The Collaborative – Advanced Tax Planning

Michelle Bertram:

Alright, everyone. So taxes are becoming a hot topic. It’s always this time of year with a lot of the extension deadlines and corporate deadlines too. And then this year is on top of the election talking about taxes continually. So I wanted to bring on and talk to our tax planning team here. Todd and Dustin from CPS. So guys, why don’t you just introduce yourselves, maybe tell me a little bit about you, the company, and the clients you work with.

Todd Mardis:

I’m Todd Mardis, President of Capital Preservation Services. We’re simply a consulting firm that partners or has in house tax attorneys, CPAs, accountants, that really spend a lot of time doing a lot of research and development on the tax code and structures and strategies that are down the middle, that allows the client, if properly structured and follows the rules, can substantially reduce their taxes. Capital Preservation Services, obviously, will implement these plans from a legal standpoint, as well as having an ongoing relationship with our clients with what we call an audit defense plan, which is a couple of meetings every year to make sure our clients are following the plan and maximizing.

Dustin Jeffords:

I’m Dustin Jeffords. I’m one of the tax attorneys here at CPS. I handled some of those meetings that Todd was just speaking about, the two meetings a year to backtest our tax savings as well as planning for the future.

Michelle Bertram:

Sounds good. Now, when we talk about tax planning a lot of people think, well, my doesn’t my CPA do that and help with that. Can you just talk a little bit about what you do with corporate structures, and how you put together plans, and what a tax plan looks like? I guess the advantages of doing tax planning.

Todd Mardis:

Yeah, obviously a good CPA is paramount to any business and the ongoing success of that business. We certainly want to partner with the client’s CPA, if it makes sense. Tax planning is just like any other type of planning. If you’re reactive and you’re handing over your W2’s, your 1099s, your K1s, and getting your expenses together right now, which a lot of us have been doing, then that’s really reactive. There’s nothing proactive about that.

So we tell our clients in that scenario, you’re playing defense versus our clients are having ongoing meetings yearly. And quite frankly, it just gives them the ability to play offensively versus defensively when it comes to how much taxes they pay.

And again, everything we do follows a tax code, but, at the same time, it has to be done properly and documented properly. So there’s a little bit of work on the client’s end.

Michelle Bertram:

Right. And so too when we think about this, you know, when it comes to like corporate structure, there’s not like one corporate structure that’s the best, right. They all have advantages and disadvantages. And so how, how you kind of put that together with your tax plan?

Dustin Jeffords:

Sure. If there was one corporate structure that was better, you know, far and above the rest, and there would only be one, right. All the other ones would be basically extinct. Um, what we’re able to do is utilize the type of corporate structure that the client has in place now. Try to minimize the negatives and then, you know, beef up the positives. Then also looking at expanding and opening up different types of corporate structures.

One of the corporate structures that we like to utilize is a C Corporation. C Corporation allows owners to be both an owner and an employee, and, um, allows us to be able to take advantage of a lot of employee benefits that they can not take advantage of in their operating company currently.

Todd Mardis:

And the structure has to be properly owned. That’s the stock of that additional corporation we create. And that’s kind of a missing link that I think a lot of people miss and when you miss that, you lose a lot of advantages a properly structured C Corp offers.

So, you know, through the years of hundreds of hours of research and development, and just studying the tax code, we’ve come up with a form or a way of combining the different corporate structures that really become substantial when it comes to tax savings.

Michelle Bertram:

Sounds good. Now, what are some of those, like benefits or tax savings that they might get from a plan like that?

Todd Mardis:

Yeah, so some of the smaller strategies would be ways for people to have a tax deduction on the out of pocket expenses they have for their medical insurance.

Currently, their expenses have to exceed seven and a half percent of their adjusted gross income and for our clientele, that’s really not going to happen. Their incomes are just too high and done correctly, and follow the rules, those expenses can be deducted as well as disability premiums, educational calls for kids who are also employees of the corporation. We can pay up to $5,050 per year towards their private school, or college, or post-college graduate schools. Those are a couple of those smaller ones.

There’s also the ability to time the amount of income taxes you pay on a given year by having different physical year-end versus having all calendar year ends. And then there are just a plethora of other benefits, and again, as you know Michelle, most of the things that we do aren’t these huge tax deductions. Most of them we refer to it as if you’re cutting the tree down with the ax you did one chop at a time. So a lot of the strategies are insignificant, but when you add them up, they certainly become significant to the client.

Michelle Bertram:

Right. So it’s not like it’s one magic bullet. The whole quote-unquote magic bullet is putting together a tax plan that utilizes all of these different strategies and together they’re powerful.

Todd Mardis:

Yeah. And for your CPAs and your wealthy clients, many of them have seen the benefits of doing estate tax planning, right. You know, someone does estate tax planning and they pay $5 million in taxes. Someone doesn’t do estate tax planning and they pay $17 million in taxes. And again, it’s just, you know, planning will always outperform non-planning.

Michelle Bertram:

So let’s say a business owner comes to you, what are they really paying in taxes or ineffective right before, like the planning process. And then by working with you, what’s kind of the after like the net result and, and how you lower their taxes or the savings they might see.

Dustin Jeffords:

The average client comes to us paying around 34 to 37%. Um, you know, their effective tax rate is between 34 and 37%. And after our planning, you know, obviously depending on the income level, we’re able to get that person down anywhere between 17 and 25% effective tax rate.

Todd Mardis:

Yeah. And so Michelle, like one of your clients that you work with had about a million and a half income, uh, and they were paying around $600,000 in taxes. Post Capital Preservation Services planning, that client was paying about $330,000 in taxes. So still very significant, I would say about half. And so, you know, on the lower end, our clients, it really starts making sense for people to have discussions with you and our firm if they’re in that a hundred thousand dollars range of taxes or approaching a hundred thousand dollars amount.

Anything less than that, and again, this is assuming everyone’s not cheating on their taxes and doing everything right. Um, because there are ways to reduce your taxes, and we see it all the time, but if you were ever audited, it wouldn’t stand up with the way that our scrutiny of an audit. So for your clients who are in that a hundred thousand dollars, roughly, of state and federal income taxes that they’re paying on a yearly basis, we can typically get that person down to a 40, 50, $60,000 liability.

Michelle Bertram:

Right. And for this type of planning, I know you have some other kind of standalone strategies, but for the structure planning we’re talking about now is really for business owners, right. That can kind of control how they get paid.

Todd Mardis:

Absolutely. Yeah. It makes a lot of sense for clients who own their own business. It’s almost impossible to help someone who can’t control their income as a W2employee.

Michelle Bertram:

Right. I think the last question I think that comes up and on people’s minds a lot is, you know, is this going to increase my audit risk? Or how does that look at? So can you answer that a little bit? 

Todd Mardis:

I’ll start and then turn it back over to Dustin because he handles our audits.

There are a lot of different triggers from the audit. One is your number got pulled. The other is if you’re doing a transaction of interest or a list of transactions that can trigger an audit. And thirdly, the IRS uses what’s called a discriminatory index test. Um, and it’s a multiple-layer test. Um, but the number one factor in determining if your number gets pulled using this indexing is how much money do you make. So if you make a million dollars versus making $850,000, you got about a 10 times higher rate of being audited, just because your income higher. So certainly your discriminatory index test will be higher. Your score or chance of an audit if you make $600,000 versus you make $400,000.

So our planning process is very pragmatic and that we create deductions and we create timing issues to where the client’s income goes down, thus their income tax liability goes down.

So, we’ve not seen an increase in an audit. As a matter of fact, given our content, we probably have a lower than average tax rate. If you do get audited, we stand behind everything we do and we’ll defend the audit and we’ve had a hundred percent success so far and Dustin has been very integral in that success. So I’ll kind of let him speak to what his experience has been.

Dustin Jeffords:

Yeah, absolutely. So like Todd was saying, we actually kind of end up reducing audit risks as we’re going through the tax planning process. For instance, if we can, if somebody is making a million dollars in taxable income and we’re able to get that down to $990,000, we just reduced their audit risk by half. We cut it in half. And on paper, you know as Todd mentioned, it is going to make you seem like you made less money. Right.

And we also have, what’s been very effective in our audits is what’s called our document systems program. It’s making sure that the client’s documenting strategy properly, you know, we make it pretty seamless for the clients. They receive emails at the end of every week to document their hours and then to document any strategies that they’re utilizing. And that has been very substantial in our defense of any audits that have come up.

Todd Mardis:

Yeah. You know, there are two soft tests that the IRS, even if you have a tax code of backing up what you did, there’s economic substance, which we all know means, you know, was it helpful or did it change your business in a meaningful way?

And then reasonableness, you know, and I call the reasonable or 162 test, the smell test. So everything that we do has to be looked at through the lens of, “Does it meet economic substance and is it reasonable?”

And then the third component is, can you prove what deductions you took and that they’re legitimate?

So we always tell our clients, look, if you can prove a deduction is legitimate and you have substantiation of it, the IRS can’t disprove something you can prove.

However, if you take a deduction and even if it’s legitimate, but you can’t prove how you took it or why you took it, and you can’t create that substantiation in the eyes of the IRS if you’re audited, you have a 50/50 chance of having that deduction withstand an audit? So one of the reasons we’ve been so successful is, you know, one, we know what the IRS is going to say and two, we create an environment in which our clients are very well-skilled at keeping records and understanding what the deductions are, why they took the deductions.

And again, Michelle, it just goes back to planning. CPAs are great and we couldn’t do a lot of the work without them, but many times the CPA is just, uh, they have a lot of workload, right? They’re doing audits, they’re doing bookkeeping, payrolls and they just don’t have the time to spend on the research side that we do.

Then again, the ultimate test is you have to be an attorney, which I’m not, but I was smart enough to hire a bunch. Those attorneys are the ones that do the implementation and can create corporate structures and put operating agreements together and just legal work. So even for our, our best CPAs, and we have a lot of partners all over the country, they still have to rely on the tax attorneys to help do the implementation once the plan is designed.

Michelle Bertram:

Right. And so I think you, you hit a couple of things I want to mention is I know I hate paperwork. And so does everybody listening, then nobody wants to do additional paperwork, but if you’ve made the process really simple, so doing it, let’s say it takes five, maybe 10 minutes on the max a week to do it. And it saved you half the money in taxes, what’d you do the extra work. And most often people would, and, and they hit it to your point. We have a great group of CPAs that have recognized that, I mean, the tax planning is so broad or just taxes in general, right? The tax codes about 70 some thousand pages. Um, and so the CPAs that kind of prod this together, and part of The Collaborative here really understand that and reached out to have you as part of their team, the tax attorney to go through and create these plans and help them, um, with the clients and do all the documentation with the clients and all the research that they can’t do it in order to get the savings for their clients.

Todd Mardis:

Yeah. We want to be part of the CPA’s team. Uh, we’ve actually partnered with a couple of CPAs, uh, that said, Hey, I need to be offering more proactive advice, not just returns for my clients. And so what we do is we just try to be an extension of their, of their practice, um, some CPAs are even creating a platinum type planning group or certain of the clientele. Um, because the truth of the matter is the average CPA, um, may have 300, 400, 500 clients, but they may only have 40 or 50 that really need what we do. So it wouldn’t make sense for them to create us inside their office. Um, so we feel like it’s a great value add to their practice to partner with us. And again, we just want to be part of the CPA’s team.

Michelle Bertram:

Yup, yup. And so that’s kind of what we’re doing. And the purpose of The Collaborative here is to bring the ideas to you and bring the top, I think, to have a good team, we have specialists kind of all over the place. Todd and Dustin are great with all this. And I don’t, anybody’s better at putting the tax plans together as they are.

So again, if you’re a business owner, you’re paying over $100,000 or so in taxes, and you’re trying to figure out what to do, we need to at least schedule a call.

I will say this, the process is simple now, Todd and us, we’ll take a questionnaire, a quick little snapshot of your business, take a look at the taxes, review all that for free and create a custom proposal that says, this is how we’ll put it together, these are the tax codes that were used, etc.

That’s probably about a one-hour call just to go through and make sure you and your CPA and the team understands what you’re doing.

There’s no cost to that. So if you’re worried about it, or you’re paying a lot of money in taxes and you want to see what else is out there, I would encourage you to at least fill out that questionnaire and I know Dustin and Todd do great with that.

So thanks guys for sharing today. I appreciate it.

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