So many of us bear the brunt of taxes, affecting our wealth-building journey and efforts. But what if you can get around it, and legally at that? In this episode, Rondi Lambeth sits with someone who is on a mission to help business owners around the United States grow their profits while paying as little tax as legally possible. He is with Tyler McBroom, CPA and Managing Partner for his firm, Measured Results. Here, Tyler shares with us some tax strategies from his years of experience as well as from his book, Cashflow & Grow. He talks about how you can take care of not only the top line but, most importantly, the bottom line and what are the most common mistakes people make when it comes to taxes in business. At the end of the day, it is not about how much money you make but how much you keep that matters. Don’t let taxes get in the way of you achieving your wealth goals. Join this conversation to learn how to monitor your cash flow for a healthy growth of your business.
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Tyler McBroom: School Of Wealth Podcast Interview
I’m super excited to have a guest on that I’ve been waiting for quite a while. His name is Tyler McBroom, CPA. Tyler, thanks for coming on the show.
Thanks for having me, Rondi. I’m glad we were able to work this out.
I’ve been waiting for this interview for a while. I left home at fifteen. I started getting coached by a guy named Wally Williams from John Day, Oregon where when I left home at fifteen, that’s where I ended up. I went to work for him at 15.5 to 16 years old or somewhere in there. I then got licensed as a funeral director and an embalmer apprentice. I learned all about the human body and how to embalm and bury people and all that but I also learned something and that was it’s not how much money you make that matters, it’s how much money you keep. That’s something that Wally taught me since I was sixteen years old was taxes.
I remember his wife would show up every Friday to get her petty cash. I always would wash her cars and do all the stuff but he was always talking about tax deductions. For years, I have been obsessed by learning about taxes and it’s my sport. What’s crazy about it is I never went into the tax field. I just like it. That’s my NFL, if you will. I’ve been anxiously waiting to have you on here because I know that you are a tax strategist and you worked with my mentor, Tony Robbins, and lots of other people that you and I are friends with. I was super excited about having you on the show. Thank you for taking this time.
I’m happy to be here.
I know you got a new book that came out. What is it called?
It’s Cashflow & Grow. It’s exactly what you started with, which is, “It’s not just about what you make. It’s about what you keep.” Most business owners are way too focused, “How’s that top-line growing? What’s coming into the sale? What’s revenue?” They’re not focused on what they have in the bank and on what’s coming to the bottom line. They’re not monitoring the numbers that matter that drives the future and healthy growth of the business. I want to create a simple book that is easy to read with real-life lessons and stories. It runs through the habits and routines that you need to be implementing in your business from a financial standpoint to grow healthily.
Every 90 days or so, I go to a meeting with a bunch of entrepreneurs. Kevin Harrington is one of the guys who come in every week or every time we talk about business. People pitch their business and go over their top line. Everybody talks about their top line, “We did $50 million in sales, $30 million in sales.” It’s interesting because there are guys in there who are doing $50 million, $60 million, $70 million, $80 million in sales, but netting like $1 million or not netting anything. Look at Uber, for example, or even Netflix. I think Netflix had its very first profitable quarter in March 2020?
Yes. Amazon is the same thing. That’s why everyone loves to harp on Amazon, “No, they’re not paying any tax.” They have a thing called net operating loss carryforwards because they lost millions for years. They’re doing okay as a business.
With the book, you talk about not just the top line but increasing the bottom line and part of that is a strategy on your taxes. I had someone argue with me on this one. I said that, “Taxes are our largest expense in life.” Regardless of what we do, we can’t get away from paying taxes. We can strategize and come up with a tax plan and legally pay less in taxes, but we can’t just not pay taxes. That’s called tax evasion. You and I both know it’s illegal.
That’s how Al Capone got thrown in Alcatraz. It wasn’t because of selling drugs or killing people. It was tax fraud.
It was on the Arete Syndicate Facebook group. Someone had said something about Bitcoin and how it’s tax-free money. I don’t know if you saw that post.
I missed that one.
Someone was talking about investing and, “What do you think about Bitcoin?” Somebody put on there, “Yes, the number one thing to invest in is Bitcoin because it’s tax-free.” I responded back with, “It’s not tax-free. Just because you’re not paying taxes on it doesn’t mean it’s legal.” What else can we get out of this book? I promoted a lot of books on my show. I’m a huge reader. I read every single day. I’m not a reader who reads to brag about, “I read a book a week,” or Tai Lopez, “I read a book every single day.” We found out he’s not even reading it. It’s the staff reading it and then doing cliff notes. I read and implement. When I get a copy of the book, what will I learn in that book? What will my readers learn from reading the book? What can they implement from it as well?
In addition to the focus on, “Not just what you make, it’s what you keep,” two things are key in your business, especially if you’re a growing business or starting out, to monitor your cash and cashflow. Once you hit zero in cash, it’s very hard to dig out of that hole as a business owner. I’m going to dive into all the processes of having a rolling twelve-month cashflow statement. Most people, where you’re looking at, “What’s going to be coming in based on what you’ve invoiced customers or clients? What’s going out based on bills that you have coming? What’s going to be left in the bank?”
Most businesses that I’ve worked with in my time as a CPA do what I call managed by bank balance. It means every morning when they pour their coffee, they open up their bank account, either on their phone or logging into their computer. If there’s money in there, then they spend it. If there’s not, then they don’t or they put it on the credit card. They’re not looking at where the money’s going or where it’s coming from and, “Is that a good number?” It’s how to manage your cash and benchmark against your competitors. Someone selling t-shirts is going to have different metrics than someone selling credit repair services, someone selling financial services or someone running a construction company.
In addition to monitoring your cashflow, we want to look at benchmarking against other competitors in your industry to say, “How am I doing? Is that okay?” If it is okay, keep running and monitoring that. If it’s not okay, how do we fix it? Where that leads to is monitoring KPIs or Key Performance Indicators. I dive into the book on high-level, how to set KPIs, how to monitor them, which ones are good numbers and bad numbers to monitor. Those are big lessons for business owners that I’ve seen a major gap in business owners not taking advantage of to build their business in a healthy way.
I remember when I was probably 25, 26 years old, I was a firefighter at the time for Littleton Fire in Colorado. I worked about 8 to 10 days a month, 24-hour shifts, which meant I had another twenty hours. As someone who strives to be better and provide for my family better, I always had a business on the side. I started a little construction company called DC Decks. We became one of the world’s largest custom deck builder, the number one company in America and the number one distributor of Trex products. I was doing millions and millions of dollars in sales.
I remember this guy that I ordered all my post caps and my railings. I’m one of the guys who created that system for decks with the steel pipes, aluminum pipes and then we had them powder-coated. Now, they’re popular. You can go to The Home Depot and buy them. I’d buy $400,000 or $500,000 worth of railing from this guy and have him powder-coated in my custom colors. I remember he asked me one day. He was like, “How does your cashflow look?” I was like, “What do you mean?” He went, “Your cashflow.” I was like, “I don’t know what you mean. Cashflow what?” I did not know. I was doing millions of dollars a year in sales. Yes, I was in my early twenties, but I know people in their 50s who don’t understand that. That’s good that you brought it up in the book because it’s super important to understand.
Now, I log in to my bank account. I don’t do it every day like I used to. I probably do it now once a week, maybe once every two weeks. I specifically log in on the 25th of the month, every month. I do the Profit First Method and I transfer it out to the five bank accounts that I have my profits, taxes and all that stuff. That’s the only day I truly look at it. I’ve been working on that cashflow thing. I have an idea of how my KPIs work. I can leave my business for a year. I did it last 2020. I left for ten months and it still continued to grow. We still hit the Inc. 5000 list again for 2020, even though I was checked out with the divorce and everything else. I’m glad you go through that in the book. What else do you go to? Do you go through some of the pitfalls of business owners that you see?
Yes. To your point real quick on that, checking it once a month. Once you get it on a maintenance program where you have the metrics in place and the systems and routines to do that, once a month is great. Frankly, it’s better than most business owners are doing anyway because they’re not doing it at all, other than looking at their bank balance or when they get the text alert. Those are huge. We go into some lessons around, as an example, on the industry benchmarking piece I talked about.
My mom owns a children’s clothing store. This is not someone doing multimillions in revenue. This is a small little boutique shop in town. She was discounting. We were having dinner together with my dad, who’s my business partner, and was saying, “It feels like I’m discounting a lot of clothes.” I have a bunch of inventory, but I keep discounting things. We said, “That might be normal, but let’s eat our dog food and pull up the numbers.” It turned out that her profit margins, so her discounts, were about $50,000 lower than they should have been for a retail store her size. In addition to that, another KPI is Days of Sales and Inventory. That’s a good KPI if you’ve got a product that you sell. Her inventory was about $50,000 higher than it should have been.
It’s kid’s clothes, so she’d go and say, “That’s so cute. That would look great on my grandkids.” She’d buy it and have a ton of inventory, which is awesome for selection, but it wasn’t good from an actual business practices standpoint. Setting a buying plan each quarter when she went to market increased profits by $50,000. It increased the amount of cash that wasn’t tied up in inventory by $50,000. On a company that was doing a few hundred dollars a year in revenue, a $100,000 swing is a big deal. That’s one story that has resonated with a whole bunch of my clients. People who have read the book as well said, “That’s me. I need that.” That is one of the biggest lessons.
I got into a little bit about the culture. In my mind, culture drives profitability. We were ranked in the top twenty CPA firms to work for in the whole country for small firms. I talk a little bit about the pieces, habits and routines that we do to drive culture and make it a fun place to work. Everyone is leaving our industry right now in public accounting. If you got an industry for that’s rough to work with, I think it’s about as bad of a rap as we get for those crushing and grinding tax season hours. We’ve put some mechanisms in place to not have that. It’s been fun to grow a team that people want to show up to work for.
Congratulations on that award or recognition. That’s powerful. Top twenty, you said?
Yes. I think there are 40,000 CPA firms in the country.
I use a CPA to file my taxes. I don’t even know their name. I use agent W or something. I’ve never spoken to them and emailed them because I use a tax professional who does everything, an EA, an Enrolled Agent. He sends it and then they stamp it. I’ve talked about why I do that on my show. I won’t talk about it now. I know on January 2nd, my guy immediately files extensions. It doesn’t matter if I’m ready or not. I’m ready. My books are up-to-date within a couple of days. I have a full-time bookkeeper. She keeps everything up-to-date. Generally, though, we’ll push it out until September because I don’t want to pay.
If you get a refund, if you file early, if you owe, people tend to put it off as long as possible.
I put it off and file it. I have a C corp. I do the shuffle game, the tax year-end thing with the C corp.
Which you can do with an S corp, too.
I have four S corps and one C corp. The C corp, I had it set up for a different reason. That was a part of a debt settlement company I had. It has a very high likelihood of litigation, so we made it a C corp. The rest of them were all LLCs or S corps in Wyoming. I remember prior to the tax professional I use now how crazy my CPAs were, like 24, 36 hours straight. I always thought like, “Why do you guys put yourself through this? Why can’t you put your clients on a schedule to where they get it done?” I think you’ve done that if people work with you and you got rid of those grinding hours.
We’re only working with business owners. We made a strategic decision when we started growing a few years ago to say, “This is the client that we want to work with. It’s got to be a business owner who’s been in business for a while. They’re above a certain threshold so we can make an impact on them. Also, non-business 1040 clients.” With the way the tax code was set up, their returns have one correct answer. There was nothing we can do for them, especially in our area of expertise. They shouldn’t pay us the fees that we’d have to charge to make the juice worth the squeeze on that.
We send them to the guy down the street that I used to work for. It was exactly what you’re talking about. I remember going through it when it was a small shop. From 8:00 to 5:00, we were in tax interviews all day long. At 5:00, we shut the doors and it was time to do some tax work at that point. I’d be doing the prep. He’d go to the fridge, crack open a beer and start reviewing returns. He’d drink about 4 or 5 beers until 10:00 at night reviewing returns. I was like, “I don’t know that I want this to be my future.”
Isn’t that the saying, “Choose mentors who have the life that you want?” If you’re working for somebody, your boss or supervisor, and you look at their life and you’re like, “Do you want to be that person in 10, 20 years?” That’s more likely who you’re going to be. Tell me what the most common mistake that you see people are making when it comes to business according to taxes.
I was going to say in my real bread and butter area of expertise, I think it’s not taking advantage of tax planning. As I mentioned, when you’re an employee, for the most part, your return has one correct answer as long as you don’t make errors. From a tax planning standpoint, you can give away more to charity. You’re going to get a deduction if you’re out of cash. It’s more about finding a charity you believe in. Don’t just give money to get a tax deduction. You can get an HSA account and max that out or max out your 401(k) or put money in an IRA.
Those are the things that you can do as an employee. As a business owner, there’s a whole new world of tax planning, though. If we printed out the US Tax Code, we stacked it up and I held it in front of me, you could grab a Colt .45 magnum, stand across the room from me and fire at me and the bullet would not pierce through the tax code because it’s so thick. A lot of people think, “That sucks because that’s way too complicated.” What I see is problems create opportunities. All of those are opportunities for business owners to take advantage of the tax code.
The reason why we’re so busy this time of year is most people think that the time of year to meet with your CPA or EA, your tax pro, is February, March. “It’s tax time. Let me get my shoebox of debt of receipts that I’ve shouldered for all year long, print out my bank statements and hand them over.” Usually, it’s one piece at a time, very slowly. Just give them all at once and then, “It’s time to fill out my tax return.” That’s the least effective time to meet with your tax professionals because number one, we’re all stressed out. Everyone wants to meet with us. Number two, there’s nothing we can do to have an impact on your numbers. We’re historians filling out the forms at that point. Once the clock strikes midnight on December 31st and Ryan Seacrest wishes everyone a Happy New Year, we can’t do anything to impact your numbers.
When we were at our Arete event back in Coeur d’Alene in 2020 where Mr. Wonderful was saying, “Accounting dollars is the first dollar I spend with all of my investors and all the companies I invest in.” It’s better to meet before the end of the year. We run year-to-date numbers and say, “If you do nothing, your tax bill is going to be X. Let’s do 1, 2, 3, 4 action items so that your tax bill is Y and it’s $10,000, $20,000, $30,000 lower. Sometimes a couple of million dollars lower. If we don’t meet before the end of the year, then we can’t do anything for you.” The faster you’re growing, the more often you should be meeting with your tax professional. If you’re staying steady year-over-year and your numbers are about the same, then meeting once a year before the end of the year is fine. “Did anything in the last year change? What are the things I should do? Give me my marching orders.” That’s fine.
If you’re growing 20%, 30%, 40% or more per year or if you’re on the Inc. 5000 list, then your business in January looks completely different than it does in June. It looks completely different than it does in October. You have access to different types of strategies as you graduate up to different levels of your business. Having a routine and schedule to proactively tax plan is one of the very first things. One of the first things that when we get new clients, they go, “I wish I’d met you ten years ago when I started my business so I wouldn’t have thrown away multiple six figures in taxes.”
I meet with my tax professional the second Tuesday of every month and then we do quarterly as well. One of the things I tell my business credit clients, credit repair and investing clients and the readers as well is, “Nobody cares about your money as much as you do.” It’s not your CPA’s job per se to save you money. Most CPAs are being counters. They’re just filing tax returns. They’re not looking to save you money next year. They’re looking through the rearview mirror, “What happened last year?” I know you do things differently and that’s why I have you on the show. What I tell people is, “It’s your responsibility, you as the business owner, to learn all that you can about taxes and then get a tax professional that you can say, ‘I learned this. How can I do that?'” Most CPAs are going to say, “Get an IRA. Get an HSA. Set up a SAP. Do charity.” I know you do things a little bit differently and I appreciate that.
What about incorporating? This is something that I see a lot because I deal with a lot of mortgage bankers, real estate agents and real estate investors. They’re sole proprietors. In fact, I met with one. He called me on December 30th. I was in Costa Rica at my annual officer’s meeting in Costa Rica. I always go out of the country and take all the officers with my board members. We were in Costa Rica on the beach when he called me on December 30th. He was like, “I made this much money. What can I do to save on taxes?” I was like, “It’s too late. When I get back from Costa Rica, we can sit down and talk.” I sit down. The number one thing, he is a sole proprietor. I was like, “This is the first thing we got to do.” He was like, “My CPA said I shouldn’t incorporate because it’s expensive.” What do you say about that?
Before my Instagram and social media presence took off and then we get aligned with Tony Robbins, about 40% to 50% of our clients were realtors. The reason why is because it sounds like the guy who called you up on December 30th. They need help. They don’t know what they’re doing. They’ve thrown away so much money by not filing as an S corporation as a sole proprietorship. I touched on that. The reason why it makes sense is, yes, it can be expensive in that you’re spending that couple of extra grand a year with an extra tax return. You have to do your annual minutes. You have to keep bookkeeping records, which you should be doing anyway. That’s one of the best things you can do while you’re lowering your tax bill. It’s going to save you $15,000, $20,000 a year potentially.
The other side benefit is the audit rates are about six times lower than as a sole proprietorship. As a sole proprietor, you’ve got about a little under a 2.5% chance of being audited. As an S corp, you have a 0.4% chance of being audited. That’s a perk, too. The tax savings is primarily in the form of self-employment tax, which is essentially your portion of Social Security and Medicare as a self-employed individual. When you’re a W-2 working for the man, earning your paycheck, let’s say you’re making $5,000 a month and you get your pay stub, you’re not taking home $5,000 a month. If you look at your pay stub, there’s an amount taken out for income taxes, Social Security and Medicare. That Social Security and Medicare are about 7.5% of your paycheck. Your employer matches that and sends 15% into the IRS.
This hammers so many people when they’re self-employed when they’re first starting out making some real money in their business. There’s no one to withhold that 7.5%. There’s also no one to match it, but the IRS still wants their 15%. You’re left holding the bag for 15% self-employment tax and the first $133,000 of your income on top of income tax. That’s an extra $25,000 to $28,000 a year potentially. That’s all well and good because it means that you’re earning Social Security credits if it’s even around by the time a lot of us retire. The way the Social Security works and why this is a critical tax-saving strategy is on the first $15,000 of your wage of your self-employment tax, 85% of the tax you pay goes into your actual Social Security bucket. You’re getting credit for it. It’s adding up credits. You can access that at retirement.
Between $15,000 and $45,000, that number drops to only 35% is going into your actual bucket. The other 65% is going into the Washington money fund, going to help people who are earning less and fund their Social Security. On everything, we’ll have $45,000 until it caps out at $133,000. The vast majority of it, only 15% of the tax you pay is going into your Social Security bucket. You can form an S corporation, pay yourself a reasonable salary of $50,000. If you make $150,000 of business profits and previously were paying $27,000 in self-employment tax and now you pay yourself a $50,000 wage and take a $100,000 profit distribution, instead of $27,000 in self-employment tax, you’re paying about $7,000 or $8,000 in payroll taxes.
I don’t know who you’re going to, but most of most accountants I know aren’t charging $20,000 a year to file an S corporation tax return. Certainly, not for a real estate agent tax return. Yes, that costs you a little more, but the savings in addition to sleeping better at night because your audit risks are lower more than pays for the costs. It also has other tax advantage things you can do, like renting your home out for a shareholder board meeting. If you’re making about $60,000 a year or higher and depending on your state, there’s a couple of states that don’t work for, that’s the first easiest thing you can do to drop your total tax bill significantly.
That’s something that I recommend to all my coaching clients. I’m not a tax professional. I’m not giving you any advice on anything. I always say this, “Always talk to your tax professional.” Talk to somebody like Tyler, who is a CPA. I’m just sharing with you my opinions on what I’ve heard, what I’ve learned and what I paid tens of thousands of dollars. My tax strategy guy, it’s about $75,000 a year is what I pay my guy. I haven’t personally paid income tax in over ten years. It’s well worth it for me. It’s a great ROI. We do some crazy stuff like captive policies and defined benefit plans. There are ways that you can legally reduce your taxes to almost nothing. With the apartment complexes, the depreciation on the apartments wiped off all my costs segregation.
That’s usually the number one thing I recommend is when people are making $50,000 to $100,000 and most realtors who are doing this full-time are making a $100,000 a year. The first thing I say is, “You need to incorporate, whether it’s an LLC taxes and S corp or whatever you talk to your professional. Let’s wipe out that self-employment tax because it’s 15% off the top.” To reiterate what you said, it’s 15% that’s above your salary. You have to have a reasonable salary. This is where people get messed up, as you will attest to, is what’s reasonable. I think you’ll probably agree with me.
If you go on Google and you type in whatever your job is in your state, because if you’re in Arizona versus Manhattan, Scottsdale versus Phoenix, Austin versus Boise or whatever, there’s a big difference. You might be the owner and CEO, but you’re being the office manager. You go to Google and you type in “office manager in Omaha, Nebraska” and then you figure out if you’re working that. Correct me if I’m wrong on this. What I’ve told people is, “If you’re the owner of it and you’re acting as an office manager, are you working 40 hours a week as the office manager? Are you doing other things working on the business?”
That’s a great piece that I was going to talk about. You want to have a reasonable salary, but we want it to be the lowest, justifiable reasonable salary that we can have. Yes, you might be working. Let’s say, you own a marketing agency. You might be doing some of the marketing work, but if that’s twenty hours of it and the other twenty hours is managing the risk of the business, then that’s what you’re getting the K-1 profits for. If a marketer, in this example, has a $60,000-a-year wage and you’re spending half of your time doing that, it can potentially be a $30,000 justified officer salary. That’s how you play with that.
With my company, Fortress, I honestly work about four hours a week as the CEO, working in the business doing stuff. Most my time is doing shows, interviews, TV and traveling and prior to COVID, doing speaking engagements. That was the majority of my time. My salary, surprisingly, is lower than most of my employees. My salary, not dividends, are different, but I don’t have to pay self-employment tax on the rest of it. I say 15% off the top. I want you to talk about putting your kids on payroll. I tell people this and they always ask the same question, “How old do they got to be?”
I’ll explain a little bit of that and then I’ll answer that question. The IRS has a rule that says, “If you pay your under-eighteen children from a sole proprietorship or an LLC that is owned by you or the two parents, then there are no payroll taxes on the wages you pay that under-eighteen child.” Under the new tax law, it used to be smaller, but now the standard deduction increased significantly. A child can earn a little over $12,000 a year and pay zero federal income tax. Depending on the state, they’ll pay a little bit of state tax. You hire them and get them on the payroll. Number one, you have to pay them. Number two, they have to do something to justify that wage. You get $12,000 a year tax-free money for doing that.
The you-have-to-pay-them part, how that works is this. We talked about getting an S corporation and then I said, “The benefits are if you pay it from a sole proprietorship, what do you mean?” Paying your kids is not that unique and new of a tax-saving strategy. Where the separator is most CPAs have their clients pay their kids directly from the S corporation. If you do that, then it’s subject to payroll taxes, which is 15% on the wage. It costs about $100 a year per kid. What we do is we get a tax ID number that’s a sole proprietorship that’s a labor-management company, marketing agency or talent management company. You transfer the money from your S corporation as outside services to your personal bank account that’s a sole proprietorship and your 1099 yourself. You then put the money into the kid’s account. That’s a W-2 issued from your name to the child. That’s how that works logistically to get out of the payroll taxes.
What do they do for the wage? If you’re a real estate agent, you can take them door-knocking with you. You can have them help with some of the paperwork. For our younger children, what a lot of our clients do is hire their kids as models for their social media pages and websites. People love doing business with a family man or a family woman. My kids are all over my social media. A lot of people who are doing anything online have pictures of their kids up there. We did some market research. We have a client who has children who are models. We gave him a call and said, “Out of curiosity, what do they make per shoot?” They made $500 a shoot. If you set them up on a monthly retainer for a couple shoots a month, take some pictures and post them up, that’s your $1,000 a month wage. That’s how you have little Johnny, who’s eighteen months old, justify $1,000 a month salary. The cuter your kids are, the more you can justify charging. In most parents’ eyes, their kids are cute.
Back up a little bit because I want to dive into that, when I owned my construction company, I have three kids and paid them $0.25 per screw that they picked up off of the client’s grass and yard. These screws were very special screws. They would cost me anywhere from $0.50 to $1. When you’re 30 feet up in the air, sometimes they fall. They’re expensive. I didn’t want to leave a bunch of screws and nails in my client’s yard. My kids would get on their hands and knees, crawl through the grass in the summertime, play and pick up screws and I paid them. Their entire childhood, they got paid from me. I never gave them allowance. I didn’t buy their cheerleading outfits or pay for their soccer schools because they had their own money.
I’ve been doing this forever. I do it with my grandson. Some of my best-viewed videos on YouTube, are my grandson explaining how he hates income taxes. I give him an allowance to pick up dog poop and then I make him pay taxes. I make him file a tax return. He’s been doing this since he was six years old. He does his tax return and then he gets some money back at the end of the year. I play this game. I got some videos where he talks about how he hates the IRS, he doesn’t like paying taxes and how he writes things off. I want to dive in that. You’re an S corp. You set up a sole proprietorship. You get an EIN number from IRS.gov. You file it. Is it for banking purposes only?
No, it’s so that you can file the payroll tax forms and issue a W-2. You don’t even have to have a separate bank account. When you’re a sole proprietorship, your business is you in the eyes of the IRS. I always recommend if you’re running an actual business to have a separate business bank account, but it can be cut straight to you in your personal account. It’s not for banking purposes. It’s for payroll tax purposes so that you could file your 941s, W-2s and all your payroll tax forms.
You set up a sole proprietorship. Do you need to have the child on the bank account as a signer with you?
Usually, it’s a savings account. In most banks, they don’t like the kid opening the account. It’s just an account in their name. From there, if they want to gift that money back to dad or back to mom, that’s $12,000 as an annual gift allowance.
This is just a way. Let’s say you got three kids. I’ve always said above age six. Would you say above age six other than the modeling?
It’s pigs get fat, hogs get slaughtered. We have the grin tests. If you’re getting audited and you’re the auditor sitting across me and you asked me what this expense is, you got to be able to tell what that is without grinning for at least sixty seconds.
When I had my office prior to COVID, my grandson came into the office every day, emptied the trash can for 22 employees, vacuumed and wiped down all the keyboards with Lysol wipes. He made sure he emptied the trash cans in the bathrooms and the kitchen. He did the dishes. He made sure there’s toilet paper and paper towels. I paid him as janitorial expenses. You could do door knocking. If you door knock as a real agent, you have your kid follow along with you and put flyers on. We got that. That’s how you do that part of it. It’s about $12,000, little less than $13,000.
I think this year is $12,600. They started adjusting it by $200 a year. It used to be $12,000. Now, it’s like $12,200 or $12,400. I don’t memorize those numbers. Once they’re over eighteen, it still depends. You can jump that up to about $30,000 to $35,000 tax-free and if they’re in college and by opening up a marketing S corporation in their name and hiring at S corporate that they own passively. It’s more complicated than we have time for it. Once they hit eighteen and you’re supporting them, especially if they’re going to college and this works if you’re supporting your parents too, you can get about $35,000 a year tax-free.
I did this for my grandmother. She was in a nursing home. They had to liquidate all of their assets. My grandfather died and all their money was from his military pension. Once he died, the pension is gone. We put her in a nursing home. She was still able to drive and all that. She wants to hang out with her friends and not be alone, but she didn’t have any money. I did the same thing. I put her on as marketing and she did some stuff for me. It was extra money that I was already giving her. That was the thing. I’m giving my family money. Now, I’m running it through the business to write it off.
You’re shifting it from your higher bracket to almost a nothing bracket.
That’s why I tell people, “Even if you have to pay them more than $12,000, they got to pay taxes,” They’re going to be a lower bracket than me. I’m at $37,000, soon to be $39,000 if Biden’s thing goes through. For me, before my deductions rather, I’m at $39,000. I want to talk about this. This is something that I have in private talk to a lot of people about because I’m in that circle with exotic cars. I’m into cars. Our good friends, Andy Frisella and Ed Mylett are into cars. Andy, especially, he’s into cars. I write off my exotics, but I do it in a way that’s a marketing expense. Some people came to me and said, “I leased a Lamborghini Huracán. I leased a Bentley. I’m writing the whole thing off.” I said, “You might be thinking you’re writing it off, but there is a limit to how much you can write off on luxury vehicles.” Let’s talk about that.
The luxury vehicle, there’s a cap per year on depreciation that you get that’s around $10,000 or $11,000. Normally, it’s the price of the car divided by five over a five-year period to get depreciation. Once the five years is up, then they tack on at the end an extra $5,000 or $6,000 that you get to depreciate as long as you own the car. It drags it out longer. The reality is, anyone who’s buying those kinds of cars isn’t going to be holding onto it, at least, as a driver. It might never sit in the garage. If it’s over 6,000 pounds, it doesn’t matter how fancy the car is. You can write it off in the first year. There are no limits as far as like, if you buy a Lambo SUV that’s big and it’s a $400,000 car, there are no limits. If you buy a Lambo car, then they have those limits in there.
Isn’t the leasing at $18,000 a year is the most you can write off for the lease?
I don’t memorize those numbers. It’s right around there. If you write in more, then it ends up having to get included in your officer compensation and overall tax.
Specifically, I had a guy who reached out. He leased his third Ferrari and he was like, “Yes, I’m writing off $12,000 a month.” I was like, “No, you’re not. Yes, you’re writing off, but it’s adding it to your officer compensation later.” I believe it’s $18,000 a year per luxury. It was Obama who put it in place. It’s like $1,500 a month.
Now, airplanes are subject to Section 179 and bonus depreciation. If you have a plane, there are limits to $1 million or $2 million a year that you can deduct. You can’t go buy a $10 million plane and write it all off in one year, but that does count same as a large vehicle.
I’m going to do that. I have an airplane now. I’m looking at Citation VII. That’s a 2023 goal for me. I got to work up my speaking engagements to justify it. I did not know that I could do Section 179. That’s cool that you can do that. Go ahead and explain that really quick. I’ve talked about this dozens of times.
As long as the vehicle or the business asset that you purchase is over 50% business use, you can write off 100% of the business portion of it in the year of purchase. Normally, a $60,000 Tahoe, you’d write it off $12,000 a year over five years. Instead, if it’s over 50%, then you write off $60,000 in the first year when you buy it. That’s what that is.
For example, in December 2019, I bought a GMC Denali. It was $84,000. I put $1,000 down with my American Express card. The next day, I got an $84,000 write-off, even though it was zero money out of my pocket. The disadvantage of that is if you go to sell it in 2 to 3 weeks.
You pay tax on the entire sales price.
It’s what you sell it for. When you trade it in, the idea behind this is you buy the truck. You keep it for three years or anything over 6,000 pounds. It could be a Mercedes G Wagon. It could be the Bentley SUV. They’re all over 6,000. They purposely put them at 6,000. You write it off. When you sell it in a couple of years, you pay tax on the amount of the trade-in or the value and it just comes off. Essentially, you don’t get as much right off on the new vehicle or keep it on your balance sheet until it depreciates to nothing.
It’s all fun. I love the tax code. I think it’s 42,000 pages. You start a show talking about that. What I love about it is it’s an equal playing field for everybody. People will say, “It must be nice to be wealthy where you don’t have to pay taxes.” Anybody can do this. Yes, there are certain strategies that only if you make X amount of dollars, like the captive policies, but anybody can have a business and get it successful enough to have a captive policy and defined benefit.
If someone who’s making $100,000 a year and they meet with the tax pro and we saved him $25,000, that makes a way bigger significant impact on their lifestyle in what they can afford to live on, compared to someone who’s making $1 million a year and we save them $250,000. It matters more when you’re in that up-and-coming phase of your business.
Tyler, I’d love to have you on here for several more hours. I know you’re extremely busy, especially this time of year. Where can we find you? I know you have a large following on Instagram. What’s your handle there?
It’s my name @TylerMcBroom. You can go over there and shoot me a DM if you’ve got any additional questions or want to chat. I’ve got my book. I’m building out my actual book page, but it’s available on Amazon. If you search my name or Cashflow & Grow, you can get the book either on Kindle or on paperback. I dive into a lot of the stuff that we covered here.
Thank you, Tyler so much for coming on the show. I appreciate it. I’ll see you at our next Arete Event when we have one.
Sounds good. Thank you, sir.
About Tyler McBroom
Tyler McBroom is a CPA and Managing Partner for his firm, Measured Results. His mission is to help business owners around the United States grow their profits while paying as little tax as legally possible.
He is the United States partner in Tony Robbins’ Global Accounting Advisors Alliance and a speaker at Tony’s Business Mastery events.
Tyler recently published his first book, Cashflow & Grow, which teaches business owners the financial habits and routines they need to implement in their business to grow profitably and increase the cash in their bank accounts.