Not Your Fathers Tax GuideFINALconverted

Not Your Father’s Tax Guide

they don’t qualify or it doesn’t pertain to them. The other excuse du
jour is that the return or savings isn’t enough to bother with it. One
of the best pieces of advice I can give you (if you don’t remember
anything else) is that it ALL matters. Big, little, short term, long term,
when it comes to saving money and keeping more of what you earn,
yeah, it matters.

Adoption Assistance/Reproductive Health

Most don’t know, or think to ask about, adoption subsidies, or
reproductive health expenses. All of these are deductible if
documented correctly. Those who adopt are often offered adoption
subsidies, which are not included or counted as taxable income. The
adopted child can be claimed as any other child would be claimed on
the tax return as long as they are a dependent and under the age of
19.

A company can provide adoption assistance for employees (up to
$13,000) which is also not considered income for the employee.
These plans have to be created in writing, and all employees must be
allowed to qualify for it. The tax credits are going to be phased out
once your income goes over $197,000 dollars. Likewise, those who
are having trouble conceiving and wish to pursue reproductive
assistance can also be offered a similar qualified plan to be used
toward approved medical expenses related to starting a family. These
would be costs that were not already covered by the current medical
plan. Many IVF procedures are not currently covered, or are only
partially covered by most healthcare plans.

147

Joseph Rose, CPA, CTC

Vehicles as Tax Free Savings Vehicles

Do you have many workers who commute in on a regular basis? If
so, providing a vanpool might be a way to create additional tax
savings for the company. The van has to qualify as a commuter
vehicle, which means that it has to be able to hold and convey at least
six people, and that at least half of those seats have to be taken up by
three of the company’s employees. Lastly, the van has to be used
about 80% of the time for transporting employees to and from work.

Here’s a great example:

Luxury Lawyer Service treats its employees well by providing Lincoln
Continental transport each morning and evening to work. This
vehicle does seat six people, uses 80% of the mileage for transporting
those employees, and so, they get the tax deduction.

Transit Passes Count, Too

Believe it or not, since the expense per employee is so low,
companies can offer employees transit passes as long as they remain
below $130 dollars each month. This is not necessarily a tax free
option for the employees, but for the business it certainly is.
Employers who are 2% stockholders cannot enjoy this benefit, but
they can have up to $21 dollars’ worth of a transit pass, which is
counted as a de minimus fringe benefit.

148

Not Your Father’s Tax Guide

Parking Counts

Most don’t realize but qualified parking can count as well. This is
particularly useful if the parking is in a parking garage where a fee is
charged. Up to $250 dollars a month can be allowable for employees.
This is a tax savings for the corporation, but not for the employee as
this is counted as income.

Company Cars

About half of my clients do have a company car, and use it for great
tax savings. There is a lot to keep in mind when considering the
purchase and use of a company car. As far as an employee is
concerned if the corporation provides the car, then the employee is
taxed on the personal use of that vehicle. So, for example, if the
company purchases the car, gives it to the employee to use 75% of
the time, then the remaining 25% of the time the employee would be
taxed on. This is where the mileage log or diary is indispensable. The
IRS goes by three different methods when it comes to determining
an employee’s portion of taxes on a shared use vehicle.

The First Way: Lease Value

This is the least beneficial plan, because as a general rule it increases
the amount of taxable income for the employee. In this method, the
company is, in effect, leasing the car to the employee based on the
fair market value of the car for the percentage of time that the
employee is using it for personal use. So, for example, let’s say the car
was valued at $60,000, and the lease value is (25% x fair market value,

149

Joseph Rose, CPA, CTC

plus $500). The 25% is the amount of time the car is used for
personal use. The company pays for repairs and insurance on the car,
but the price of the gas is on the employee. The IRS provides a chart
to save you from having to do the calculations. Look for IRS
Regulation 1.61-21 (d) (iii). This is the table for calculating the fair
annual lease value.

The Second Way: Cents Per Mile

The good news with this way is that there’s less tax to pay, but the
downside is that the vehicle needs to be a fairly inexpensive vehicle
(less than $16,000). More than fifty percent of the time the vehicle is
in use, it must be used for business purposes, and the mileage must
reflect that. If the car was purchased and used for less than a year
when it comes tax time, then the mileage requirements are generally
prorated for the taxpayer.

The Third Way: Commuting Value Method

This is the method that most use, and it is the most beneficial one
for the largest deduction amount of business owners. To use this
method, though, the company can’t be leasing the vehicle, the
employee has to use the vehicle for commuting to work, the
company has to have a written policy of use created for the car, and
the employee can’t use the car for personal purposes (except for de
minimus use). Likewise, the employee can’t be the director, or make
more than $1115,00. The car has to be a company owned vehicle,
and owners won’t be able to benefit from it, except as a business

150

Not Your Father’s Tax Guide

deduction.

For any of the methods described it is a very good idea to get into the
habit of keeping a mileage log, or diary. Discrimination is allowable
where company cars are concerned.

Benefits to Attempt (write down some that you believe you would like to
implement)
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________

Ye Old Cafeteria Plan…It’s Not What You Think

This strategy doesn’t suggest that you open up an ala carte eating
cafeteria at your workplace. What it means is that you can offer a
wide range of fringe benefits for your employees, then, not unlike the
local cafeteria, the employee is able to select which fringe benefits
they want to access. Most of the benefit options include the
following offerings:

• Life insurance
• Dependent care assistance
• Disability

151

Joseph Rose, CPA, CTC

• Health insurance (with or without dental/vision)
• Long term care insurance
• Pension or profit sharing packages
• Adoption assistance/reproductive assistance
• Legal services
• Credits toward paid vacation weeks

The plus side….employees LOVE it. It is a great recruiting tool. The
downside is that most owners can’t benefit from it! This is why most
small business owners don’t implement it, thinking that if they can’t
benefit from it, then why have it?

In order to keep this kosher with the IRS, you have to have at least a
few options and benefits to offer. The participants have to formally
elect these benefits at the beginning of each year, and they can have a
limiting factor of discrimination (must have worked for the company
for several years, months, days, etc.). 25% of the nontaxable benefits
can’t go to high level executives, and the cafeteria plan has to be in
the company handbook and have specific information about it. Sadly,
neither the owner, nor their spouses or dependents of anyone who is
making more than $115k can benefit from it. This strategy works best
if the company doesn’t discriminate, offers less than 25% of the
benefits to the owners or administrator (highly compensated
employees).

152

Not Your Father’s Tax Guide

Receipt of Stocks, Bonds, or Restricted Property

For the most part this isn’t going to pertain to a majority of small
business owners. BUT, some small businesses, though not publically
traded, can offer a stock or other property to a valued employee to
secure future services from them.

In that instance the employee would be taxed on that stock unless
there is a high chance that they would lose it. In other words, an
employee who is offered restricted stock won’t be taxed on it if they
have to perform future services in order to make the stock viable. If
the employee sells the stock, or if the risk goes down, then it is
taxable, once again. This is where the advice of a certified tax coach
can really save you a lot of headache.

Phantom stocks are not stocks that have died and refused to move
on. Rather, it is a term that is used when small businesses want to
make employees feel that they have a certain amount of ownership in
the company. This is basically a promise of a bonus for employees
for the value of the company shares, or the increase, over a period of
time. Phantom stock acts as an actual stock, though in reality, it
doesn’t really exist on this plane. It exists in the future, and the minds
of the owners, which can benefit the employee. It’s like owning the
stock without getting the shares, and allows employees to participate
in the appreciation of the company’s stock without too much risk.
Phantom stock will be taxed like a cash bonus, when it is actually
received. The plus side to this is that it can be given to anyone. There
are no deductions that accrue to the employer until, of course, the

153

Joseph Rose, CPA, CTC

phantom stock becomes ‘solid’. So, Phantom stock is a fringe benefit
that can be offered to employees without all of the extreme legalities
with regular stocks. It can be combined with restrictions, such as
having worked at the company for a number of years.

Qualified Stock Options (publically traded)

This is for those companies who offer publically traded stock
options. So, this type of stock is a hybrid of the phantom or
restricted stock. The difference is that the employees are taxed only at
capital gains rates instead of other rates. In a nutshell, qualified stocks
is an offering extended to employees should they elect to purchase
shares of stock in the company where they work for a fixed price
over a fixed amount of time. This benefits the employee if the stock
goes up. For example, an employee is locked in at the $50 a share
rate, but the stock actually goes up in appreciation to $100 share
(that’s what it’s worth). That employee can still buy their shares at the
fixed rate of $50. If the shares fall below the $50 mark, then the
employee can elect not to purchase. The downside is that the
employer sees no upside from this as far as a tax strategy. But it does
benefit the employees and can allow a company to attract and retain
high quality employees.

Tax Free Housing

This particular fringe benefit doesn’t work for too many small
businesses, but still, it is a viable benefit for some. If in the course of
doing business it is more advantageous to provide housing for your

154

Not Your Father’s Tax Guide

employees, then the IRS will allow this benefit to be offered. Of
course there are several stipulations that must be adhered to.

First, the lodging has to benefit the employer and the business.
Secondly, the lodging must be a condition of the employment of the
employee. Lastly, there also must be meals provided at the premises
of the company.

A good example of where this would be an acceptable practice is for
those businesses who offer 24/7 security or surveillance. Or,
managers of a bed and breakfast. They would have to stay in the bed
and breakfast in case of emergencies, and while there their food and
lodging are provided tax free. The employer has to provide these
benefits to the employee directly, otherwise, if the company
reimburses for any of the meals or lodging it immediately becomes
taxable.

Exceptions for Meals

There are quite a few criteria that work very well for small businesses
who want to offer meals at the worksite. For example, if there was a
business meal during work hours offered by the company, at the
worksite, and it was part of the overall compensation packages, then
it would be tax free for the employee. However, if the employee went
offsite to eat, like at a restaurant, and it was not expressly for business
purposes, then that would not be reimbursed by the company.

Another situation that would work, and is one that I often use
myself, is if there are seasonal times when the workload and customer

155

Joseph Rose, CPA, CTC

intake is such that there just isn’t a lot of time to stop for lunch. So,
in these instances, I offer workers onsite meals to save them time.
Otherwise, by the time they broke away, stood in line somewhere,
and tried to scarf down a burger, they would be late getting back to
the office (not to mention have a raging case of indigestion).

Another good example are employees who work for a restaurant or
café. Meals that are furnished to employees who work there are tax
free to the employee. Or, medical companies who provide lunch for
staff members because, in reality, they are always on call.

Did you know that if your worksite is so far off the beaten path,
where there are no ready sources for meals, then you can provide
meals tax free? Meals furnished to more than half of the employees at
the office are tax free. This is the case for most hospitals, for
example.

Achievement Awards/Bonuses

This is a great tax deduction for the company, and it is also seen as a
tax free situation for the employee as well. Win/win scenarios are
awesome when they happen. Giving your employees tangible
personal property in the form of a trophy, plaque, or in the form of
cold hard cash (no more than $1600 though), fits into this niche. This
works very well for employee retention and as motivation for
employee productivity.

Many become confused with the ‘tax free’ definition. It means that
the tax qualified benefits are completely free from taxation, either on

156

Not Your Father’s Tax Guide

the federal or state levels. This includes income taxes, Medicare taxes,
and social security taxes. In some instances, the benefits packages at
various companies are so attractive that though the salary is lower
than in other places, the benefits are worth the reduced salary. Savvy
employees know this, especially if the benefits are those that they
would really want or need.

Benefits to Attempt (write down some that you believe you would like to
implement)
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________

Retirement Plans

Many small business owners don’t believe that they are large enough
to be able to offer retirement plans for their employees. Actually, it’s
not as difficult as you might think. There are roughly three types of
retirement plans that can be offered.

Profit Sharing

In this type of plan you will have a lot of flexibility, but they also have
the lower of the contribution amounts that can be placed into them

157

Joseph Rose, CPA, CTC

annually.

Money Purchase (Defined Contribution Plans)

This type of plan offers some flexibility, but higher tax advantaged
savings can be realized. There is a minimum contribution that is
required annually.

Defined Benefits

This one takes some organization to pull off. As the employer, you
will set or ‘define’ the guaranteed level of monthly retirement benefit.
The company is required to make sure that their contribution is there
each month. Most companies, even the larger ones, have done away
with this one as there is not enough flexibility.

Small businesses can also take advantage of several retirement
options, which were developed by Congress just for small business
owners. The two that are utilized the most are the SIMPLE (Savings
Incentive Match Plan), and SEP (Simplified Employee Pension Plan).
What’s nice about these types of retirement plans is that they don’t
require annual reporting as the others do. To establish them you will
only need the IRS form and whatever additional paperwork that is
required by your banking institution.

SIMPLE is Simple

Many small business owners love this situation because you can put
back up to $6000 a year, then the company will match that amount
up to 3% of compensation. This is called a company match.

158

Not Your Father’s Tax Guide

Employees have to elect to have a certain amount reserved from their
paychecks each time, otherwise the owner can legally enjoy the full
benefit of the plan themselves.

SEP Plans

This type of retirement plan is extremely flexible. You can elect to
put in as much as you can, or want to, up to 13%. And, what’s nice is
that it can be adjusted each year to keep in step with the company’s
cash flow situations.

IRA (individual retirement plans)

This is one of the easier retirement options for the small business
owner. The contributions are limited to just $5500 (unless you are age
50 and over, and then you can throw another $1000 into the coffers).
These can be obtained through various banking institutions or
insurance companies.

These are those types of situations where it would benefit the owner
of a small business, if they were an S-Corp, for example, to hire their
spouse, then offer the fringe benefits to them, which gives a dual
benefit of reducing the salary of the owner, increasing the tax
deduction for the company, and offers benefits for the spouse (who
will still be taxed on some of them, but in the end, will be at a lower
tax bracket anyway).

159

Joseph Rose, CPA, CTC

Benefits to Attempt (write down some that you believe you
would like to implement)
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________
______________________________________________________

160

Not Your Father’s Tax Guide

CHAPTER 13

Okay…so I won’t lie to you. Some tax shelters that people engage in
are illegal. Those include things like offshore accounts and dodging
Uncle Same. That’s NOT what I’m referring to in this chapter. Tax
shelters, such as real estate investing, has gotten a bad rap over the
years, due to the economic bubble bursting and leaving a lot of
homeowners stranded.

161

Joseph Rose, CPA, CTC

But there are plenty of tax shelters, and real estate investments, that
are completely legal, and are smart in terms of providing additional
ways to reduce your overall taxable income. In the end, good guys
can finish first if they know a few strategies.

Timing is Everything

There is a great debate over whether location or timing is more
important when investing in real estate. For my part, I vote for
timing. Location is immutable. It is where it is, right? Either the
location is good or it isn’t. And, for those that have been doing real
estate investing for a while, they know that to make money
consistently, you have to often overcome location.

Timing translates directly into money where real estate is involved. It
determines how much of a return on your investment you’ll see…and
when. Ideally, you buy when a property is low, and then sell it when
the price covers your initial investment (and some).

Reasons Why Investing in Real Estate is SMART

Reason Number One: Right now the interest rates on home loans is
incredibly low. Right now with the entire global economy rocking
from recent developments, the one area that hasn’t been shaken has
been the real estate sector. This is because the low interest rates mean
low monthly payments. For a while it looked like the Federal Reserve
was going to increase the interest rates, but ironically, just the
opposite happened. They dropped some more.

162

Not Your Father’s Tax Guide

Reason Number Two: Banks are less squirrely than they were five or
six years ago. In many instances, as long as you have a job, decent
credit scores, and have a history of making payments, then you
chances of grabbing a fixed rate loan is pretty good.

Reason Number Three: Real estate prices have gone up slightly from
2010, when they were supremely low. Still, great deals are out there,
and if you’ll look at foreclosures (yep,.sadly there are still a lot of
them) you can really find a good deal.

Reason Number Four: Technology has drastically cut down the
legwork needed to find the bargains. Investing in real estate in your
dad’s day meant looking at thousands of pages of documents, driving
around, and talking to potential renters. Now, most services that you
would need can be found online, and you can even view a potential
place by using google street views.

Reason Number Five: Job stability is not a given these days. Having
additional income coming to you through real estate investments
hedges your bets in case of a layoff, a downturn, or to take up the
slack for lower revenue months.

Reason Number Six: This is really the biggest one: it reduces your
overall taxable income when you own property. This is a tax book,
after all, so of course I think this is the biggest reason. But, if your
overall goal is to save money, then reducing the amount of money
the government wants to remove from your wallet should be a very
large goal. And this is one of the easiest, and best, ways to do that

163

Joseph Rose, CPA, CTC

over a longer period of time.

Passive Income

Passive income is income that comes in to you without your having
to do much in the way of work. Literally, it means you sit back and
the money rolls in. Sounds too good to be true? Actually, once you
get things going, it works exactly like that.

Here’s why. In a passive real estate structure, you can have a tax-
deferred cash return that lets you keep your earnings. This is because,
unlike stocks or bonds, which are taxed at the highest brackets, your
depreciation expenses offset the income that you receive from rental
properties. This is called a pass-through benefit.

In this type of asset building strategy, you don’t rent the property at
all. This means you don’t have to deal with tenants, broken toilets, or
having to fix an AC unit at three in the morning. With passive
investments, you don’t even have to deal with a bank, directly. This is
because you are dealing with a professional private real estate
investment company. They deal with the banks.

It doesn’t take much to get involved in this. You do some research,
sign the paperwork, then transfer funds. After that, especially if
you’ve invested in properties with current tenants already in them,
and where there is historical cash flow, then your money is working
for you, literally, around the clock.

164

Not Your Father’s Tax Guide

Not So Passive Income

The not so passive real estate investment is where you actually buy a
fixer upper, and flip it. Or, in some instances, the buyer (you) lives in
the home for a while, and then turns around and sells it for the next
place (also a fixer upper). This works for a while, and as long as you
are game to continually live in homes that require some TLC.

The other way is to actually purchase a home, then turn around and
use it as a rental property. This also means that along with that comes
the added headaches of screening potential renters, taking care of
maintenance requests, and so forth.

This is also a viable way to reduce the overall taxable income, but it
does come with more investment of time and energy, as well as
money. If you have plenty of time to devote to it, or it is something
you enjoy doing, then this is certainly an avenue you could explore.

Using Real Estate as a Tax Shelter

Real estate is a tax shelter, par excellence. The year that you purchase
your home you cut your taxes that same year, and every year that you
own it. Common deductions include:

• Mortgage points
• Mortgage interest (on the loan)
• PMI (private mortgage insurance)
• Property taxes

Likewise, as a small business owner, if you take out a second

165

Joseph Rose, CPA, CTC

mortgage or use the house’s line of equity, then the interest on that is
also deductible. In 1997, it was determined that a person could keep
up to $250,000 of capital gains (profit) on the sale of a home as long
as you’d lived there for two years. AND, better still, if you are a
married couple, then you are allowed to double that amount
($500,000). All costs associated with selling a home are also deducted
from the capital gain.

The secret that most real estate moguls know is that the secret is to
structure a like-kind exchange where you replace a new property with
yet another new property, and do this for the foreseeable future. In
this way, you might never have to pay taxes.

A Tax Free Life with Real Estate

The beauty of real estate is that it is one of the, if not THE, easiest
asset to borrow against, should you ever need to. Investors can
borrow from banks, by refinancing, and end up paying zero in taxes
on it. It’s like a tax free loan, plus you keep the real estate asset and all
of the deductions, come tax time, that you are entitled to.

The perfect trifecta is using like-kind exchanges, using the
depreciation, and the debt, to never have to pay taxes on the real
estate. The 1031 real estate exchange is something that defers capital
gains which would have come to you through the sale of a property.
This is done by immediately ‘exchanging’ it for a similar property.
You can use 100% of the equity in your current property to purchase
additional property.

166

Not Your Father’s Tax Guide

What is meant by ‘like kind’ property is that the property is any real
estate that is being used in a trade, business, or is being held as an
investment. Like-kind real estate can include any of the following:

• Retail
• Condos
• Apartments
• Industrial property
• Commercial
• Raw land
• Single family
• Duplexes

So, in a few words…using a tax free exchange like this, you’d avoid
tax on the gain from the sale of the real estate, you’d get to use the
bank’s money to purchase the property, and you’d get all of the tax
basis and depreciation.

Tips to Success

There are a number of characteristics that successful real estate
investors possess. Here are the top five. Cultivate them and you’ll be
well on your way to saving yourself a lot of money, as well as creating
a long term income generating machine.

Successful RE investors know that they are in it for the long haul.
They don’t go into it as a get rich quick scheme. They learn from
mistakes, talk with people who know more than they do, and they get

167

Joseph Rose, CPA, CTC

better at it over time.

Successful RE investors aren’t experts. You read that right. They
don’t have advanced degrees, they aren’t accountants or lawyers.
They are just normal people who have learned what they needed to
know to be successful in just this one area. And, they have learned to
research like a pro. They do their homework before making
decisions.

Many successful RE investors have buddies. This means that they
network with one another. You’d do well to do this as well. Reach
out to local investors and ask them to speak with you. Many of them
love to show off their properties, and don’t have a problem sharing
their knowledge with you. They’ve all learned that the real estate
ocean is vast and there’s enough room for everyone in it.

Make your peace with math. Most successful RE investors are
champions at calculating cash flow. This will allow you to look
logically at an investment before jumping in feet first. Learn to work
a spreadsheet. Trust the math. It doesn’t lie, and real estate is a
numbers game.

Lastly, successful RE investors have a plan, a written plan, for making
their goals realities. This is where having a great certified tax coach on
hand (on speed-dial even) is invaluable. Creating a strategy for
making your financial goals attainable is never a bad move. And, all
of the successful RE investors out there, have a ‘guy’ they know that
gives them good advice.

168

Not Your Father’s Tax Guide

While owning rental property is an excellent way to invest capital,
many investors also buy it as a unique tax shelter. On one hand,
rental property works like any other investment in that the profits
you earn from it are subject to tax. But the way that investment real
estate gets taxed is unique, giving you additional expenses to reduce
your taxable operating income and also offering unique capital gains
treatments. Of course, because the IRS takes away as much as it
gives, investment real estate also has a couple of drawbacks from a
taxation perspective.

Real Estate and the IRS

Here are the pros and cons as it pertains to real estate investment, for
the purpose of reducing overall taxable income.

Pros#1: Depreciation. This is the money word when it comes to real
estate. Every year you get to write it off, and each year, in most parts
of the US, the real estate property values are continuing to rise.

Pros#2: Deductions. The IRS lets you deduct many reasonable and
customary expenses that come with owning rental property. So, you
can really rack up some savings through this allowance. Dual Use
deductions are the best because in this way you can benefit in several
ways, both personally and for the business. This is especially true if
you are considering purchasing a ski resort (for example), and wanted
to go and evaluate it by taking a vacation there. Guess what?
Deduction!

169

Joseph Rose, CPA, CTC

Pros#3: 1031 Exchanges. The IRS allows you to do a tax deferment
under a special section called 1031. This allows you to trade one
property for another without paying taxes.

Cons#1: Capital Gains. If you sell the property, essentially cashing
out, then you will pay taxes on the income. And, because it isn’t your
primary residence, you’ll be slapped with the fact that every penny
you received will be taxed.

Cons#2: There are limits on the passive loss. In other words, if you
lose money on a real estate deal, the IRS allows you to take up to
$25,000 off of those loses against other income on your return (but
only if your AGI is less than $150,000).

When You Can Take Deductions on Income Producing Rental
Property

The IRS code IRC 212 states that you can deduct property expenses
if that expense happened as a paid or incurred during the production
of or collection of income, management, maintenance, or
conservation on the property, and is a necessary expense. In general,
that includes the following:

Mortgage Interest: The interest that is charged on the actual loan is
deductible, plus any financing charges you might have accrued as a
result of financing additions, improvements, upgrades, or equipment.

Overnight Stays: Believe it or not you can deduct your lodging if you
had to stay in a hotel near the rental property so that you could affect

170

Not Your Father’s Tax Guide

repairs, inspect the property, or perform other managerial type duties.

Local and Long Distance Travel: In addition, any mileage that you
had to travel in order to affect repairs, perform management duties,
or inspect the property are also deductible.

Meals and Entertainment: This also includes the meals that you had
to have while you were inspecting or managing your property. Also,
any business lunches with new partners, potential clients, and others
along these lines are also deductible.

Legal Services: Anytime you have to bring in a professional in
reference to the venture, you can write that off as well.

Remember, any time you can take expenses pre-tax as opposed to
after tax, do it. You’ll have to report the larger amount of those
expenses possible for the rental activity so that you can take
advantage of those strategies that offset the full income you are
realizing.

Repairs on Your Rental Property

Where the IRS is concerned, there is a difference, and a distinction
between repairs and improvements. According to the government,
and you gotta love it, repairs are simply maintenance that keep the
property in good working condition. Things like keeping the paint
fresh, fixing a leaky faucet, replacing a door, all fall under this
designation. Improvements, however, add to the overall value of the
home. These include such things as additions to the home, upgraded

171

Joseph Rose, CPA, CTC

appliances, outdoor improvements such as landscaping, or installing
energy saving windows.

Are You a Dealer or an Investor?

Again, the IRS has particular definitions and ideas as to what
constitutes a dealer and who is considered an investor. Dealers are
those who buy a house with the intent to sell it are not given as much
tax breaks as those who are considered investors. The IRS looks at
these specific questions when they determine your status:

• Did you plan on selling the property within a two year time
frame?

• What was the purpose in purchasing the property to begin
with?

• How many homes have you purchased and sold within the
year?

• How much money are you making off the sale of each home?
• Is selling homes, or fixing and flipping, your sole source of

income?

In general, the IRS considers someone a dealer who in the normal
course of making a buck, treats property as inventory. Gains are
taxed like regular income, rather than capital gains in this instance.
You won’t be allowed to depreciate your property, or the like kind
exchange idea, to trade your property, either. To avoid this you’ll
want to do the following:

172

Not Your Father’s Tax Guide

• Avoid land and contracts that will cause gain to be seen as
taxable when it is sold.

• Keep your dealer properties separated from your investment
properties by having separate and distinct business entities
holding them.

• Try selling the property using a leasing option.

When considering whether or not to acquire a property to flip, you
will need to know how to evaluate that property using the Average
Remodel Value (ARV). That’s the money you think you will realize
after everything is said and done. If you are just starting out on the
fix and flip venture, then make sure that you document that you plan
to hold the property as an ‘investment’, or to use it as a ‘rental’
property. Without any dealership or investing track record, you are
actually in the enviable position of determining how the IRS will view
you. Placing your home on the market for rent (even before you are
really ready to rent it) will give you an exit strategy should the fix and
flip strategy fall through.

Last Thoughts on Real Estate

There’s a lot to know about investing and owning real estate as a tax
break or tax shelter, as well as an income producing entity.
Maneuvering through all of the legalities can make many opt out of
this wealth-building act. It doesn’t have to be that way, folks. Simply
find a guy (or gal) who is willing to give you some very good advice,
help you with contracts, assist you in making the proper designations
along the way, and you’ll be golden. Find someone who is already

173

Joseph Rose, CPA, CTC

doing what you want to be doing, and copy them. It is still the
sincerest form of flattery.
Write things down. Don’t trust that your mind, like a steel trap, will
always be sharp and lethal. It won’t be. Forgetting something in this
business can come back to give you a hard pinch where you don’t
want it. So, documenting the cash flow is very necessary in
identifying the direction that you want the project to head towards.
Research, talk to others, understand everything you are doing. The
cheapest solution won’t always be the best solution, and you have to
stay on top of the management of the property. Lastly, and not lastly,
you need a detailed tax plan for taking advantage of all the relevant
deductions and exemptions that you would be entitled to. Tax
professionals who specialize in real estate, in particular, can be your
best friends. They read all of the material you’d rather not read (or
understand). The bottom line is to reduce your overall taxable yearly
income, and to purchase a property with the intent of having a
strategy to keep cash to reinvest. And know this….the more money
you are able to keep in your pocket, the less time you actually have to
spend earning it. Tax free living is possible. You just have to know
how to make it work.

174























Joseph Rose, CPA, CTC

think they have the disposable income, or additional income, to put
back for something like that. This is a perspective that I hope to
change for you. You can’t NOT do it.

For one reason, retirement planning is a great tax strategy and many
investments that you might engage in are designed to produce
retirement income. A CHIC can help to supplement those retirement
strategies, much like an IRA would, to continue to provide additional
funds for your nest egg. And, thanks to the way the taxes are
structures for captive companies, the funds that are in the CHIC
have the ability to grow long-term into something of significance. In
short, the CHIC beats a qualified retirement plan to oblivion. Here’s
the down and dirty:

• CHICS don’t have any annual limits as to how much you can
contribute. With most plans (IRA for example) you are
limited to $5000 a year. With a CHIC you can literally stash
away $1.2 million dollars without it being taxed.

• No penalties for early withdrawal. Unlike other retirement
plans, if you need the money before your retirement age, you
can dip into the CHIC. Literally, you can sell it at any point
you deem necessary.

• Many retirement plans require a minimum withdrawal
annually. The CHIC doesn’t have this limitation.

• There aren’t anti-discrimination laws or rules attached to
operating a CHIC, so literally, you don’t have to offer it to
anyone else in the company.

186

Not Your Father’s Tax Guide

Having said all of this, I would also be remiss if I didn’t tell you that a
CHIC is not the be-all and end-all of the retirement scenario. It can’t
be. You still have to diversify, have savings, other investments, etc.
That’s because it is, legally, a CHIC, which means that if there is a
claim, money will be siphoned off. That’s its purpose, after all. The
potential for claims has to be figured in to the planning for financial
integrity.

CHIC as Estate Planning

Many who create a CHIC do so to create an estate planning strategy.
This offers a business owner a way to pass significant amounts of
money down to their family members, avoiding many of the snags
and legal red tape that often happens with inherited money.

To do this you will need to set and declare who your heirs will be,
and that they will be the owners, someday, of the CHIC. Then go
about your business as usual, collecting premiums, and so forth.
Because they are considered regular premium payments, and not gifts
of money to family members, they are not taxed.

After your death (it will be a nice funeral I’m sure) your family
members can liquidate the CHIC and divide it up. The proceeds
won’t be subjected to the usual estate taxes, or inheritance taxes, and
the money that your family will receive will be taxed as capital gains
rather than as income. Many opt to combine this with a universal life
insurance policy that covers the fees, so that the CHIC becomes a
nice vehicle to pass assets and wealth on to your family without

187

Joseph Rose, CPA, CTC

paying exorbitant taxes on it.

Are You A Good Candidate for a CHIC?

If you’re considering a CHIC, you should have some of these
characteristics, which make it a good tax strategy for you.

• A very healthy business looking for substantial tax
deductions.

• Asset protection is needed.
• Are a business that has multiple other companies (you own

more than one).
• Need another resource for wealth shifting, or for estate

planning.
• Have more than $500,000 in sustainable profits stemming

from operations.
• Have risks that are not currently covered by existing liability

insurance.

Summary

In short, a CHIC is all about risk management and as a vehicle for
wealth building and shifting. Every business has inherent risks (both
property and casualty) that fall under the uninsured, or the
underinsured. Commercial coverage often is limited and has so many
exclusions in the generic policy that might make it a necessity to
create a captive insurance company, just to protect everything. The
cost of that generic coverage, may also be a factor and the CHIC
allows you to set a lower premium for better coverage. Having a

188

Not Your Father’s Tax Guide

CHIC means that in some ways you control the outcome when there
is a claim.

As a risk management tool, the CHIC is very powerful. The
integrated tax solutions that it offers the business owner, both in the
areas of estate planning, and income is massive. And, the tax
provisions offered to smaller captive insurers means that the business
owner is offered a significant ability to defer taxes until in a lower,
and marginal, bracket.

The goal is to offer coverage that has the greatest likelihood of not
having too many claims. This coverage is considered an arms-length
coverage. So the shift that is occurring is from the captive to the
business owner, from the business owner to the captive, which in the
long run offers asset protection as well as increased tax benefits.

Remember, as cool as the CHIC is, it is still considered a business on
its own right and it will have to be operated as such. Many business
owners forget this when they establish a CHIC and it gets them into
trouble. Finding a capable management company is a smart piece of
the puzzle when it comes to maintaining the integrity of the business
so that the IRS doesn’t come calling in a bad way.

The IRS has shifted its perspective over the years and instead of
going after captive insurance companies, they now have a ‘safe
harbor’ rule that basically allows the government to regulate captives,
but also evaluate each company based on their circumstances, and
individual facts. So, sticking strictly with the principles of shifting

189

Joseph Rose, CPA, CTC

risk, and distributing the risk becomes paramount when setting up
the CHIC. You’ll have to be extremely cautious about giving
yourself a ‘loan-back’ from the CHIC because excessive loans will
trigger the IRS’s scrutiny. Capitalization has to be kept at the right
level and maintained, which means that dipping into the CHIC
reserve isn’t a good idea.
For so many years this wealth shifting mechanism was available only
to the extremely wealthy companies. Now, smaller closely held
companies have been allowed to play on this same field, opening up
many more opportunities for small businesses who need the tax
advantage, as well as the wealth generating/building characteristics
that the CHIC offers. In the end, know that you will need guidance
and a strong stomach to get it all set up and management in place.
But, once you do that, it can be a powerful wealth building tool.

190