Business Innovators Radio - Interview with James Lavorgna, Founder of Spencer Advisory Services Discussing Tax Mitigation Strategies for Business Owners

Episode Date: January 25, 2024

Mr. Lavorgna started in the insurance business in 1976 and has been in the financial services industry for 45 years. He earned his Certified Financial Planning designation in 1984. He also has earned a Bachelor of Science in Finance, Juris Doctor (Litigation), Master of Laws in International Tax and Offshore Planning, and Master of Laws in Wealth Management and Private Banking. He has been in and associated with the investment industry since 1979. And is currently an Investment Advisor Representative of Forsyth Wealth Management, Inc. fee-only Registered Investment Advisor and licensed insurance agent.He is also the Managing Member of Spencer Advisory Services, LLC, and a Certified Team Model Consultant.He has spent his career consulting with successful business owners and high-net-worth families.Learn More: https://spencervfo.com/Spencer Advisory Services, LLC and Forsyth Wealth Management, Inc. does not offer tax, legal advice or investment advice directly. We strongly encourage you to seek advice from your own qualified tax and/or legal experts regarding the best options for your particular circumstances. Investment advisory services are offered through FWM www.forsythwms.com. Life, long-term disability, long-term care, or other non-variable insurance products are offered individually through licensed insurance producers. All non-investment advice is offered through Spencer Advisory Services, LLC. In compliance with Circular 230, any U.S. tax advice contained in the body of this email, including attachments, was not intended or written, to be used and cannot be used, by the recipient for the purposes of avoiding penalties that may be imposed under the Internal Revenue Code or applicable state or local tax laws.Influential Entrepreneurs with Mike Saundershttps://businessinnovatorsradio.com/influential-entrepreneurs-with-mike-saunders/Source: https://businessinnovatorsradio.com/interview-with-james-lavorgna-founder-of-spencer-advisory-services-discussing-tax-mitigation-strategies-for-business-owners

Welcome to influential entrepreneurs, bringing you interviews with elite business leaders and experts, sharing tips and strategies for elevating your business to the next level. Here's your host, Mike Saunders. Hello and welcome to this episode of Influential Entrepreneurs. This is Mike Saunders, the authority positioning coach. Today we have back with us, James LaVoña, who's the founder of Spencer Advisory Services, and we'll be talking about tax mitigation strategies for business. owners. James, welcome back to the program. Hey, Mike, thanks. I'm glad to be back. Yeah, I'm excited to talk about this topic because I know that we're not saying tax elimination strategies because we know that you can never eliminate taxes and things like that, but you want

to talk about mitigating them or lowering them as much as possible. So when we think about tax mitigation strategies, where's the first place that you start looking and advising your business owner clients on? Well, before we actually start recommending strategies, we start with a discovery and diagnostic meeting with a client. And that's basically to clarify their personal and business direction. We start by gathering high-level information and client information questionnaire, which we call a C-IQ, and which I always mess up and call a QIC. So if you're in this meeting, if I say C-I-Q or QIC, it's interchangeable. But basically, on the personal side, we clarify the client's goals, directions, and visions.

But on the business side, we provide a diagnostic evaluation, and that provides a client with a starting point, right? We develop a business roadmap to get them to where they want to go and maximize their business potential. So we realize nobody understands a client's business better than the client. But basically, in order to maximize the business potential, they have to focus on it. So that's basically what we do in the beginning before we start making any of these kinds of plans. We take the client through and the different areas. The areas that we cover basically are tax mitigation, risk mitigation, wealth management, legal, and business advisory services. So we go through that whole area. We use a team-based approach roping in the client's advisor.

And whatever expertise that we don't have, we have a virtual family office of over 60. professionals that basically concentrate on their specialization. And throughout this, I'll be talking about some of these specializations. But when we don't, with our core team, don't have all the expertise that we need, we rope in some of these appropriate tax professionals, or I should say specialists or not all tax, to help us meet with the client and get to a point where we make a presentation to the client that addresses the priorities that have come up in that QIC or CIC. You know, the thing that I loved about your response there was, you know, hey, where do we start

with tax mitigation? You did not say, well, the first thing is we jump right into, you said, hold on. We don't know what we don't know. So let's do this assessment and let's let's get the lay of the land and Q ICC IQ, whatever the assessment's called. You're doing a great snapshot of where they are, where they want to be. You're noticing as in I have no clue what this assessment looks like, but I'm certain that it's some good information like we'll tell me about this. And now you're kind of in the back of your mind going, okay, good. That's an opportunity I'm going to be addressing.

but you it's it's like the old saying you know prescription without diagnosis is malpractice you can't just jump in and say the first tax mitigation strategy is always X because it might be Y or D or Q well we're not the physician that says okay take two aspirins and call me in the morning if you're still alive you know so we need to we have a holistic approach to our planning and we're proactive about it

And I'm going to talk about that in a minute. But first, let me explain that when I refer to tax mitigation strategies, I'm not referring to what people call loopholes. Loopholes are a connotation of something that is unintended and, you know, possibly maybe even illegal. When we speak of tax mitigation strategies, we're simply taking advantage of the way that the federal tax code is structured, excuse me, to lessen the amount of taxes that somebody owes, or that somebody owes, I should say. Yeah.

So already approved strategies. And from what I understand, and you can correct me if I'm wrong, the tax code is about eight or nine pages long, right? No. Isn't it like 50,000 or 60,000 pages? So who in the world? Yeah. business owner can know what it is and how to best use it. So I like your correlation there. It's not a loophole that kind of is questionable gray area. These are things in the tax code that business owners

are allowed to do, but many times business owners don't know about them. Well, the reason that we use a team-based approach is that we realize not one professional, no matter how extensive the background, can possibly know all this or even have the time to attempt to know all this. So that's why we use the virtual family office in conjunction with the team-based model. But as far as tax strategies, they're full in the four broad categories. Entity structuring, in other words, basically how you're going to set up your business or how it is currently set up, if you have already set it up and you're going, you know, how it's held and who distributes the income and how it's taxed.

And sometimes just by simply making adjustments in the structure of entities, it combines a lot of tax savings right there. The second one is pre-tax expenditures, which are basically strategies that are focused on making sure that you have the proper expenses and compensation being paid with the less expensive pre-tax dollars. So basically, that's a lot of what we do. That's what a lot of tax mitigation planners do, okay? But we do a lot more than that. You know, there's a lot of things that don't involve tax mitigation that are involved in our plans that help make or, you know, reduce the drag on a corporation, make it more efficient, and make sure that, you know, the taxes, or I should say the cash flow,

is in line to where the business plan of the client goes. The third one is a tax-free income approach. And then the last one is wealth accumulation strategies, which they allow us to arrange assets to appreciate or accumulate with either lower or deferred taxation. And actually, in some instances, we can pull a rabbit out of our hat and change ordinary income into long-term capital gains.

So that's pretty much fun. So we cover all those areas when we do this. But no matter what area it is, okay, it requires proactivity on the taxpayers part. Okay. You can go see your accountant and ask for all this information. But when it comes down to it, it's the taxpayer, not the, accountant who has to take the initiative below the tax bill. The only problem with the tax, most tax professionals is that they're backward-looking compliance people. In other words,

basically, they're dealing with numbers that have already occurred and they're preparing taxes and defending them in court. And most of the time, they don't have the time or the inclination or the base, the core, to go out and do proactive tax planning. So they send the client out on the road. That's the hole that we're filling at this part. That's huge. Yeah. Team-based model in the virtual family office.

It's almost like, in a sense, and I know this is not painting you in a corner, but in a sense, whatever the fee is for that aspect of your service, it's almost like, well, you know what? the fee is probably covered two or three or four times over with the money that we're finding for you that is already being wasted in taxes. So let's go find what's falling through the cracks because you don't know what you don't know. Well, first, Mike, you can't pay me in a corner. I live in a roundhouse. So, no, but you're absolutely right. Obviously, we don't even embark on the engagement if the client's not making a substantial amount, five, ten times the amount.

out way more than what the fee is. You know, sometimes you're talking hundreds of thousands or millions of dollars in tax savings. You know, what are you going to kind of price? Can you think of some examples of some times you've worked with clients that are business owners to help them kind of find some of that? What would some examples of that be? Sure.

What I'll do is I'll break. I've got a couple of examples I can give you. Let me just see here. Okay. Well, we had a husband and wife. They were architects. They owned their own firm. They were in their early 50s.

And they were having a hard time with their cash flow. And mainly the children that they wanted to send to college, they saw that they weren't going to really, they really weren't going to be able afford that. in the amount that they were, they realized the amount that they were paying taxes could easily cover the cost of the kids' college expenses, right? So they tried to figure it out themselves, but they found out, as you just mentioned before, thousands of tens of thousands of pages of tax code,

they really, really, really couldn't figure it out. Their CPA, unfortunately, was not really a big help in the process. So they got to us. And after engaging us and going through the proactive process, we found a couple of successful strategies that fit their situation. And so what we needed to do is reach out to the virtual family office and the experts in cost segregation and research and development tax

credits. Those were the two that basically did the bulk of the work. We were able to come up with a plan to substantially reduce their tax liabilities. Because you noticed in their industry, their line of work, you noticed that that might be a possibility, whereas it was sitting right under their nose. They didn't realize. But yet from the outside looking in, you thought, oh, let's take a look here, bring in the expert, and you uncover an opportunity. Well, you know, when you do this enough, there's some things that stick out like a sort of thought. You know, architects, dental people who make, you know, dentures, dentists and stuff like that, you know, that's all unique, one-of-a-kind type of things.

So they are usually eligible for R&D tax credits, inventors. if they haven't done that before, you know, then they're probably not familiar with it. Plus, they own their old building and one of our big favorites is cost segregation. Our specialists are great. And between the reduction and the taxes and the increased cash flow, it really took off a lot of financial strain. and it really helped them manage the kids' education. So that worked out real well. You know, the thing that's really neat about that example, James, is a lot of people might go,

you know, I'm making all this money and it's wonderful that you found me even more. And that's great. We'll just squirrel it away into these retirement accounts. But with that example, it's making a difference to them in their daily life right now because they were looking at the college education tuition needs, which can be skyrocketing. and when you could take that off of their shoulders, what a huge benefit that is. And it's tangible. It probably just was like a huge let them sleep better at night kind of thing because they were

thinking, do I need to drain retirement accounts? How are we going to do it? Well, you know, that's the purpose of going through the CIQ diagnostic. You know, we find out not only their pain points, but really what money means to them. You know, in other words, why are we here in this? what's my existence? Why am I doing all this? You know, we just sell everything and go sit on an island. You know, so it's unique to each client, and we're pretty happy when we can actually

get this to jive with what their values and goals are. So we're hearing another one? I think that is. Yeah, I do. I love the examples like that. Yeah, I got a couple of them. I got, this one is one of my favorites. We had a position who ran into some cash flow problems during COVID.

Go figure, right? Yeah. Who ran into cash flow problem, who didn't run into cash flow problems? Yeah, who didn't. Right. But so again, after doing the CIQ, we were able to get our cost segregation expert back to do a study on the doctor's buildings. He was very heavy in the real estate as well. and the cost segregation had never been done on this building, and it produced a substantial tax deduction.

In fact, it was way more than he could utilize at that particular time. However, we were kind of in luck because one of the provisions of the CARES Act, which was enacted during COVID, allowed a carryback of those to do. reductions for the last five years. And we were able to recover all the taxes that he had previously paid. It wiped out all the taxes for his current year, and he still had a little bit of carry forward to go forward. So that was a Grand Slam home run, touchdown, and Super Bowl win at one time.

I just love when we can utilize the tax code in that manner. And to put it mildly, his CPA was very happy and surprised. Yeah, and you probably have to be very careful how you work with their CPAs, given the fact that you're bringing things that maybe they weren't doing for them. So you have to be cautious and kind and, you know, because the CPA was doing what was in their perspective. but now their eyes are open to this. So I think that that's a neat thing that you don't say,

go fire your CPA and come use us. You said, let us work with your CPA. Well, that doesn't usually, that doesn't happen a lot. Sometimes it does. But for the most part, for the most part, the CPAs, it kind of picks up the readers and makes them start looking like, well, what am I missing here? You know, maybe I should pay a little more attention.

But like in this instance, our people work with the CPA. Because that guy, he basically gets in touch with the CPA if they need help if they're not familiar with what needs to be done. And they walk them through it. So, you know, it's not an adversarial relationship. Yeah. Oh, yeah. In fact, the CPA's probably sitting there going, I wonder who else that is in a similar situation. Could we help in the same exact way?

Well, that sometimes happens. But, you know, it takes a long time sometimes. to get the car to slow down and start going the other direction. But they do appreciate it in most instances. Because we've had some CPAs tell a client, well, you know, you really should pay your taxes, you know. And if the clients are like, are you kidding me? That's not the answer I was looking for. Yeah.

Yeah. In most cases, yeah, we started dialogue with the CPA, with the client CPA, and we usually have pretty good relationships with them. I love it. You know, that example about finding the cash flow to take care of college, spectacular. The second example about finding that lost opportunity in past tax years and now moving forward being able to have a tax savings that increases cash flow. So it makes me wonder when you find all of these new cash flow opportunities, what are some examples of what you're advising your clients to do with your team on now wealth building, wealth management? Because one aspect is mitigating taxes, but then what do you do with that found increased cash flow? Well, a lot of times, you know, if it has to do with business, a lot of times we'll find partnerships that don't have proper buy, sell agreements, business value.

etc. We free up money to have that done or or you know a private pension plan. They've got a 401k for their employees, but you know, they can't really put a lot of money away from themselves. We find ways that we can actually help them do, you know, put money away in that instance. Yeah. I don't know how we're running on time, but I've got a couple more examples of you like to hear them. Oh yeah. That'd be awesome. Okay, great. Well, and, And this really has to do more with wealth management, but, you know, it applies to business owners because they're people too. So in one case, we had a single client in her 60s. She's looking at retirement with a large accumulation in her 401K, right?

And generally that's a good thing. But however, she was concerned about the budget deficit. you know, worried how high her taxes might go in the future, you know, especially with the, in addition to the, you know, the ridiculous deficit that we have and budget that we have, the sunsetting provisions of the tax act happens in 2025. So, you know, it's guaranteed to go up unless something's done. And, you know, Congress is like always Johnny on the spot on these things, right? Yeah.

They're right there all the time. But the second thing she was concerned about was she wanted to reduce that tax burden further in the future. She's single and she probably has more than enough income to live on. But she stressed that she didn't have control over the account in the situation. She had no idea if there was anything that could be done, but she was very concerned about it. So again,

CIQ the whole thing, but we immediately identified a rough conversion. Okay, for the listeners who aren't familiar, that technique involves making distributions from some kind of qualified plan 401K

IRA to a rough IRA, right? Which is tax-free on distribution. So the idea now is on the distribution is to lower the rate pay the tax now at a lower rate

so that money could be freed up later when the higher tax rates out come out but it'll be tax free at the time so we had to do a couple of steps first because she was still working and she had her money in the 401k so we had to get that over to an IRA so she can have more flexibility with it

and have more control of it. So we did what we call an in-service non-hardship withdrawal. It's a tax-free rollover from a 401k plan to an IRA. So once there, we set up a Roth IRA to take the distributions, right? So basically, when you take a distribution from an IRA to go into a Roth, for any qualified plan to go into a Roth, you have to pay the taxes. right now at the lower tax rate. However, we wanted to see how much we could mitigate those taxes.

And she's very charitable in mind that she, she donates every year. Sometimes she gets the deduction. Sometimes she doesn't get the deduction. But what we did was we were able to figure out how many years she was going to contribute or actually donate. okay into the future how much he donates a year and we multiplied that out times the amount of years we got the year in her case it was 14 years other cases it's different 20 years 25 whatever it is in her

her case it was 14 years and what we did was um we used what a charitable split interest gift called an iclat it's like a charitable lead trust but it's basically there to to provide the tax deduction. And that would allow us to transfer money to that trust to invest and make a donation over a period of time, right, to the charities of her choice, just what she was doing. Okay. And at the end of that period, in her case, 14 years, the principal plus the interest would revert back to a non-qualified beneficiary, not charitable beneficiary, okay, tax-free. In this case, it was going to be your kids. So basically you have to pay taxes on any gains in the portfolio every year. But basically what it does is gives you a large upfront charitable deduction. Ah, so what does that do? Well,

remember, we're taking money out of that Roth IRA, I mean, the regular IRA to do a rough conversion. That's going to be taxable income. So what we're doing is we're offsetting the taxable income with the charitable deduction, okay? On the donation she was going to make every year for the next 14 years. So what we found out, we knew, in her case, what we found out is that she was bumping up against the adjusted gross income limitation for charitable deductions. It limits how much you could take a year. So instead of taking a big lump sum out of the IRA, okay, we staged it out over six, years because with a charitable deduction, you could take a deduction in one year. And if you can't use it up,

you've got another five years to use it up. So we're spreading that deduction out, I'm sorry, that distribution out over six years. So we can offset it or most of it with that charitable deduction. So that's basically a result that she's very happy with. It minimizes their taxes. And at the end of the, at the end of the period of 14 years, that money is going to go to her kids tax-free, which was going to go to her kids anyway. Okay, it's just going to go a little bit sooner, assuming she hasn't died. Yeah. But not going to be.

That's awesome. Yeah. That is awesome. I'll tell you what. We could probably go on and on with 14 more stories and examples, but just the vast opportunity that, that you're. are able to bring to your clients is just spectacular. If someone is listening to this thinking, I wonder what opportunities for increased cash flow and tax mitigation that you can find. What's the best way they can learn more and then also reach out and connect with you? Well, they can go to my website

and check out there. We have a lot of events that go on. That is a lot of free webinars. And also, I have a book out called Wealth Unleashed. You can get all out information. information at the website, and that website is Spencer V-F-O as in virtual family office.com. So it's the S-P-E-N-C-R-V-O.com. Excellent. Well, James, thank you so much for coming back on and talking about this really powerful topic. I really appreciate your time. Okay.

Thank you. I appreciate it. You've been listening to influential entrepreneurs with Mike Saunders to learn more about the resources mentioned on today's show or listen to past episodes. Visit www. www. Influential Entrepreneursradio.com.