Escaping the Drift with John Gafford - Optimizing Cash Flow and Expense Management with Tom Wheelwright

Starting point is 00:00:00 What are some of the things that people miss when they're things that shit like again fair game in the tax code? What are the most common places where you guys see and wind up saving people money? And now escaping the drift the show designed to get you from where you are to where you want to be I'm john gafford and i have a knack for getting extraordinary achievers to drop their secrets to help you on a path to greatness. So stop drifting along, escape the drift, and it's time to start right now. Back again, back again for another episode of Escaping the Drift, the show that gets you from where you are, like it says in the opening, to where you want to be. And today, ladies and gentlemen, man, if you make a bunch of money, you make a little bit of money, you just make money in general, there's somebody out there that wants part of it, and that's the US government.

Starting point is 00:00:49 And they do want their piece. And my guest today is an advisor to Robert Kiyosaki in the Rich Dad, Poor Dad community in the area of taxes. He is the author of the bestselling book, Tax-Free Wealth. He is the CEO and founder of WealthAbility, an expert on how to keep more of your money rather than giving it to Uncle Sam. Ladies and gentlemen, welcome to the program. This is Tom Wheelwright. Tom, good morning. How are you?

Starting point is 00:01:17 Good morning, John. I'm good. How are you? I'm doing good. So yeah, I mean, the bane of all of our existence, right, is paying taxes. I don't care if you're my son with his first job, seeing that check where the government, she does take a bite, or you're somebody that's making a truckload of money and yeah, they're taking it. So first of all, how did you get started with taxes? Like what's the interest there? Oh my heaven. So I

Starting point is 00:01:40 actually started back when I was a teenager. I was interested in accounting. I worked in my dad's printing company as a bookkeeper in his printing company. And then when I started school at the University of Utah as a young man, I took a tax class and fell in love with it. So I get to deal with law and I get to deal with money and I don't have to deal with lawyers. So it's a really cool job. It's a win-win there. So you said as you were a kid, you were doing the books for your dad. How did you learn how to do the books when you were a kid?

Starting point is 00:02:10 Well, my mother was the controller for my dad. So being a mama's boy as I was, I loved working with her. She taught me everything I needed to know on the bookkeeping side. My first job after that was bookkeeping for a CPA firm. So I actually started with my first CPA firm in 1979. So that's how long I've been at it. Wow. I love the fact that you love numbers in this, because I preach on this show. Normally, inevitably, with every high-level entrepreneur that comes on, the subject of, is college worth it, normally comes up at some point. And I make the point always with my kids who are approaching college age. It's like, I am a big believer in college. I think it's a great place to learn how to be an adult, but I think it's also very important what you actually study. I think if you go there and study native pygmy mating rituals for four years and you don't

Starting point is 00:03:09 understand why you have to get a job as a tour guide, yeah, there's an answer to that. And I say that the only two things that I ever want my kids to study in school are either finance and accounting as an undergrad because it's the language of business. And I think if you have a firm understanding of those two things, then you can kind of do anything. So did you go to school for accounting or did you just stay with education? I did. I went to school. I did my undergraduate in accounting, and then I did a master's of professional accounting at the University of Texas in Austin and just specialized in tax there. Right. So really learning the language of

Starting point is 00:03:46 business and numbers is so important. And I think most entrepreneurs don't, they don't bother to learn this stuff until there's a problem. I mean, when you stroke. I'll tell you a shocking story. So I used to teach a class to a group of entrepreneurs twice a year, and it was called Cashflow 101 is what we called it. And this was actually going through their financial statements and walking them through the income statement, the balance sheet, statement of cash flows. We had people in there who'd been in business 30 years that had never heard their financial statements. And just going, how have you survived? And think about how much more they could have thrived if they'd really understood their numbers and understood what caused their numbers to be what they were.

Starting point is 00:04:33 Yeah. In the business that we're in, we do a lot of joint venture partnerships with large brokers across the country and different things. And I have found, especially in the real estate industry, I'll go into some people that have some massive businesses across the country. I mean, monster businesses, and they just have no clue. Like I say, okay, let me see your balance sheet. Let's look at your balance sheet. Let's look at your financial statement. What you just said, they can't read them because they've just never had to. Most entrepreneurs just get so focused on driving the top line. Sales saves everything just, you know, sales saves everything. We just

Starting point is 00:05:05 need more sales. We need more revenue. We need more income. And then everything else kind of takes care of itself, which can be true to a certain extent until you start adding the Uncle Sam to the equation. Hey, this is Steve Simms and I'm a proud partner of Escape the Drift podcast with John Gafford. And I've got something for you for Simms Distillery. The community that is based on you, the entrepreneur, giving you the tools to be a better version of you. Visit Simms Sims Distillery. The community that is based on you, the entrepreneur, giving you the tools to be a better version of you. Visit simsdistillery.com. Use the word escape to get a $694 discount off of the community that you need to be part of when you want to demand a better version of you. Thanks a lot. Escape the drift and see you in simpsons delivery.com well sales does solve a lot of problems that's there's no question about that and and if you

Starting point is 00:05:49 don't have sales of course nothing else you do matters right on the other side of that um actually uh reading your finance statements is not that difficult if you want i'm happy to kind of walk through some of the things that we teach people on how to do that absolutely so if you are a. So if you're a person with a business or a person that is thinking of getting a business or even some of the older people I've met that have businesses that never bothered to understand this, listen up because here it is. Let's go through. Let me make it very simple. So basically your two primary financial statements are your profit and loss or income statement, income and expense, and then your balance sheet, assets and liabilities. And then what's left over is your equity. But let's start with the income statement. So the purpose of income, here's the

Starting point is 00:06:38 number one thing to remember. The purpose of income is to create cashflow. And believe it or not, there's a lot of income, doesn't create cash flows. You've got a big receivable out there from a customer, it's income, but it isn't cash flow. And if it's not cash flowing, that's not a good customer. So that's how we analyze income. The second thing we look at is expenses and understand that the purpose of an expense is to create income. So it's really easy to analyze your P&L. If you look at all of your expenses and you go, okay, does this actually create income? If it doesn't create income, let's get rid of the expense. If it does create income, would more money allocated to that expense create more income? And if it would, and there's a multiplier effect like there should be,

Starting point is 00:07:22 then allocate more income to that category. And so that's the easy way to do the income statement. The balance sheet, I think, is particularly interesting. So I used to always wonder, why is an asset on the same side of the financial statement as an expense? And the reason is actually very simple. It's because an expense creates money in the short term. It creates profit in the short term, whereas an asset creates profit over a long term. But they both have the same purpose. One's just a longer term expenditure of money, whereas the other one is a short term expenditure of money. The expense is short term, the asset is long term. So again, if you look at your assets and you go, well, wait a minute, do I have an asset that's not performing? In other words,

Starting point is 00:08:10 is it not producing income or reducing an expense? It could do one of the two, but in some way, it's got to increase my cashflow in the end. If it's not doing that, do I need to get rid of it or is there a way to make it start working? The fourth one is actually what's most surprising to people because in your business, you know this better than anybody, that the purpose of a liability is to create an asset. And so if you look at your liabilities, a lot of people are scared to death of liabilities. It's debt, right? People are afraid of debt. It's a four-letter word. Well, if you're afraid of debt, it's simply

Starting point is 00:08:49 because you don't trust the asset. That's all it is. So if you trust the asset, in other words, if that asset produces lots of income, and you could add more money to it through a liability to create more income, then you would do that. So you actually want more debt. But if your debt's not producing an asset that actually produces income, then you shouldn't have the debt. So it's actually a very simple analysis. And just remember, if you're afraid of debt, it's because you don't trust the asset. When I talk to people about, especially starting out, I look at expenses on a P&L as offensive money or defensive money. That's how you have to look at it. Is this expense or line item, is it something that's going to create revenue like buying

Starting point is 00:09:39 leads or paying for something that, like you said, is going to generate revenue or is defensive money, meaning it's there to service the sales once the sales happen. And, you know, so many people, especially in my industry with real estate tend to make cuts in the offensive money before the defensive money, because they're just too, you take back on, you know, it's like, well, I delegated this task out by paying this person to do it. And now I don't really want to take that back on. So they start cutting the offensive money, which is marketing. And now they wind up with a major problem, which is they've got a bunch of sitting around doing nothing. Yep. So when people are looking, you know, because obviously look, times are getting a little lean right now out there right now. So if I'm looking at my P&L, we'll get to taxes, but if I'm talking about just P&L management, what are some things you would look at in a business in order to

Starting point is 00:10:29 maximize cashflow in a business in times like now where we have recessions? Well, I think you're right. First of all, I do think I like the offense defense. You do have to look at your offensive money very much, but you have to look at the defensive too. I mean, you can think of taxes as defense, right? What you're doing is you're spending money to reduce another expense. And so I look at your team members, you know, who's on your team, including your tax advisor, including your attorney, including your insurance agent, all of these people are on your team. Are they making you money? And so a lot of people, they've got a tax preparer that isn't making them any money. It's just costing money to prepare a

Starting point is 00:11:11 tax return. Now, unfortunately, tax returns are a necessary evil, but there's another way to look at them. They're also, in our view, looking at last year's tax return is the first step in my tax strategy for this year. And the way I report last year's strategy is on this year's tax return. So I need to see a tax return that is actually tax effective. So it's not just a matter of, yes, I want good advice and I want good advice throughout the year. That's an important asset. I think your advisors can be your greatest assets because they're long-term. A lot of business owners look at advisors as an expense and they look as an expense that, well, I'm trying to reduce my expense.

Starting point is 00:12:00 But if you look at it as an asset and the assets producing money, I was talking to a prospective client this morning. I said, what do you want in a relationship with the tax advisor? He says, I want one that makes 10 times as much as they cost. I'm going, well, I think that's wise. I mean, I think 10 times is a lot. But I think if I have an asset that produces two times what it costs, I want more because that's 100% return on my investment. If I can get 200%, 300% return on my investment,

Starting point is 00:12:31 that's a better investment than buying a piece of real estate. Real estate's not going to get you 100%, 200%. Well, I think the mistake a lot of people make is, I mean, there's levels to the game, right? There's levels. And when you first start out, I mean, you might go to H&R Block and you go in there and there's a dude making 20 bucks an hour preparing your return. It's just real simple. It takes you W-2. They're just there to try to get you to borrow money from them so they can charge you a VIG on the return. And there you go. And you have your money today. That's what it is. And, you know, people get complacent and they stick with that guy and, or that person. And then maybe they're like, Oh, it's getting a little more complicated. Maybe I'll just get another CPA. And this CPA might not be well-versed in the industry in which you work, but they are, I mean, they're very good with the tax code. They're just, but they're going to prepare just vanilla as they can, you know, straight up, you know, right down the middle. Just accuracy. They just want accurate. Just send it right down the middle, 85 mile an hour fastball, right over the plate. Easy peasy.

Starting point is 00:13:31 You know, no curve balls, no sliders, just right down the middle. And then you get with that person and that person, you like them, they do a good job. They're always following your stuff. And then one day you wake up and you've got a four or $500,000 tax bill. Right. That's been me. And then all of a sudden you're like holy like this is not cool like i gotta figure this out and then you know you you pivot to somebody else now here's a question so at what point do you think like let's talk about the levels of the game there because i think that's a great piece of advice when do do you pivot? When should you be worried about each level, if that makes sense? What should you do?

Starting point is 00:14:09 So your story is a perfect example. You woke up and you were paying $400,000 to $500,000, which now it's too late to get that back. So wouldn't you like to have that advisor on the front end before you're paying $400,000 or $500,000. So I think pivoting early tends to be an enormous value. And it's a much better use of your money than pivoting late. One thing you didn't mention is a lot of people start off with the do-it-yourself, right? They're the DIY people. And they'll go read my book, Tax Review Walt, say, got it. I'll put this in my tax return. I'm going, probably not a good idea. Probably not a good idea, but okay. If you want to do it, that's fine. But I always like to pivot early. I want to have

Starting point is 00:14:59 an advisor who's better than what I currently need because i will need them so i always want to level up i want to be one level up from what i think i need so should you i mean this should this start as soon as you start having to really pay is that what you're telling me for sure for sure because the minute you're paying i mean you're giving up money that you shouldn't have to give up frankly i mean getting to tax-free wealth is it's if you have a good tax advisor and you're willing to do the work um it's not that hard because you know i gotta tell you i just i think people look at cpas the same way they look at like your insurance like i just why are you why are you a state farm because i always have been right i just i've just

Starting point is 00:15:42 bill comes i pay the, the car's covered, you know, and that's it. They don't, it's like set it and forget it. I don't want to think about it again. Like nobody wants to go look for a new dentist. It's the same reason people invest in mutual funds, right? Yeah. Just cause it's just set it, forget it. And it's done. It's easy. It's easy. Cause, cause we love comfort. We love what's easy. And, but you know what ain't easy is writing those big ass checks. It's not easy.. So my question is, let's ask another question. So a guy like me, right, that you take over, you look at last year's tax return and you're like, holy smokes, you missed a lot of opportunity here when I made the shift into what you're talking about.

Starting point is 00:16:19 I was advised not to go back and refile those previous tax returns. They're like, dude, you're going to get audited. If you do this, you go back and do it. He's got to eat it and move forward. And that's just how it is. Yes. You know, you know,

Starting point is 00:16:31 just how to hit my hot button there. So I appreciate that. Um, so here's, here's my, my view is that if you're a tax advisor, tax preparers, afraid of the IRS,

Starting point is 00:16:43 you need a new tax advisor. Because you think about, I mean, you go back to those levels, H&R Block, then you have the small time CPA, and then you have a pretty good CPA. Then you end up with one of the big national firms. And if you're really lucky, you find a really good local firm. Because just like restaurants, the local firm, the good local firm is always going to be better than the chain, right? Always going to be better than the chain. So you'd rather have the entrepreneur serving you rather than some employee who's just out of college who doesn't really know much. And so what happens is that a lot of people,

Starting point is 00:17:22 they're so worried about the IRS. They're so scared of the IRS, I, I still think people are more afraid of the IRS than they are of public speaking or death. And because, but the CPAs and the taxpayers are just as afraid of the IRS, I'm going, wait a minute, the people who work at the IRS, they're not bad people they're good people okay they're doing a really tough job i mean seriously can you imagine having customers that all hate you that's that's a really tough job right so i mean i have a real estate broker so it's pretty close well there you go so you know you you get it you get what i'm talking about right i feel the pain a little good

Starting point is 00:18:04 good good people trying to do a tough job, but they're not. The A students don't go to the IRS. Let's face it. The A students don't go to the IRS. The A students go into private practice. And the really good students that are also entrepreneurs, they have their own practice, like one of our franchisees at WealthAbility. So what we're looking at is, I look at if your CPA is afraid of the IRS, that's like saying, I'm afraid. I don't want to play one-on-one with this other player because I'm afraid they're going to beat me.

Starting point is 00:18:42 I'm going, well, if they're a high school player, wouldn't you rather have a professional, an NBA star playing for you? Wouldn't you rather hire LeBron James? Rather than go in, add it yourself or have some CPA that is barely out of Little League. So I just think stay away from any tax preparer or tax advisor that is afraid of the IRS. It's great that you want to be aware of the IRS. We want to do things that reduce your chances of audit, but those who aren't afraid of it are more likely to reduce your chances of an audit than those are. Those who are afraid of the IRS are just more likely to increase your tax bill.

Starting point is 00:19:19 I think I'm going to defend the people right now, because I think we've all been, you know, everybody that watches the news has heard that the Biden administration, you know, I believe the fund, it depends on what channel you watch. But some channels say, finally, get what the US government deserves. And some channels say weaponizing the IRS against the American middle class, the entrepreneurs and business people, depending on how you vote is how you look at that. But I think when you hear the word weaponize, when it comes to the IRS, by adding so many people that will come back and audit, I think, I think people in general, I don't, I think like, look, even if you're a tax preparer, I think if you tell somebody like you might get audited, I think the knee jerk reaction to most people is, oh shit, I don't want to get it's like, you know, it's, it's like, I might be able to win this fistfight, but I would rather just not have it. You know what I mean? Is, is, is the thinking.

Starting point is 00:20:12 I, I, I understand that, but, um, I'll give you an example. We just, uh, we don't handle very much. We don't have very many audits for our clients because we're really good at preparing the tax turn so that they don't get audited. That doesn't mean that our clients pay a lot of tax. Okay. So those two are not mutually exclusive. You don't have to pay a lot of tax to not get audited. But the same thing is, is that let's say you do get audited. I think audits are going to triple or quadruple, no matter what you do, they're going to triple or quadruple over the next few years. Okay. So wouldn't you rather have

Starting point is 00:20:42 somebody who's not afraid of going into that battle so that you can sleep at night? In fact, John, I'll give you a way to always sleep at night and never be afraid of the IRS. You ready for this? Yep. I'm ready. I like it. Okay. So you can play along with me. Repeat after me. I will never- I will never- Speak to- Speak to- The IRS. The IRS. Not your job. That's my job. So really the way to not worry about it is to have a professional on your team that will handle it

Starting point is 00:21:15 for you. The IRS doesn't scare me. I've been dealing with the IRS for 45 years. Why would the IRS scare me? I went to the best schools in the country. I was in the national tax office for Ernst & Young. So the IRS doesn't bother me. And I don't ever take a position that I can't defend. We just finished an audit where we had a very large income. And the end result was, I think we ended up paying $2,000 over two years. That was it. Well, let's talk about this too. Cause, cause a big mistake, especially in real estate, man, this is such a mistake that so many people make is, you know, real estate. You have a lot of people come to the business and they might not

Starting point is 00:22:02 have ever made this much money before. And all of a sudden they start making money they're not paying quarterly and then they get a big bill at the end of the year and all of a sudden it's like oh crap and then it starts to sit there and that bill's there what advice do you give to to my folks that were not responsible that have some bill hanging out to the irs how do you deal with that you call your cpa let them take care of it okay you just say hey call, call. That's it. That's it. Don't, don't talk to the IRS. Don't worry about it.

Starting point is 00:22:27 Send it to me. We're going to look at it. We actually don't charge extra for doing that. In our practices, you just send it, send it to your, your tax advisors, what you should be doing. They should be asking for it. Send it immediately. If there's a mistake, we'll figure it out.

Starting point is 00:22:43 If, if you owe the money, pay the bill. Just pay the tax. Because the problem I've always heard is it's not necessarily running the balance then, which you don't want to do. I mean, obviously you don't want to do that. No, that's a bad idea. It's the not filing that gets you in really deep trouble. It is. So remember that under payment penalties, that's only a half percent a month. So that's 6% a year. But in late filing penalty is 5% a month. That's crazy.

Starting point is 00:23:13 So it's 10 times as much to not file. So file an extension, it's not hard. File an extension. I think that's what happened. I think people get behind to the IRS and then all of a sudden they're like, oh crap, I can't go file again because I- to file file file file file always file now i know that every time you turn on the tv again where i'm just right now i'm talking which is hopefully nobody

Starting point is 00:23:38 that's listening to us has these problems but i'm just it's just where my mind is going because uh you know obviously you see those TV commercials all the time. Like do you owe money to the IRS? Don't just stop the phone call. Stop this. We'll take care of this. What percentage of this stuff actually gets worked out? Are these companies real? What like you tell me? Uh, some of, some of them are, I mean, we work with, uh, with the tax resolution, uh, a couple of, a couple of tax resolution companies. We don't do it. We refer that out. Yeah, it's not as often as they like you to believe that you actually get a reduced tax bill. More often than not. So here's the general rule. If the IRS looks at your income and you could pay it back over five

Starting point is 00:24:22 years, you're going to have to pay it all back. Yeah. Period. Okay. There's no offer compromise. There's no reducing your tax bill. If you can pay it back over five years, the IRS is going to require you to pay it all back. Okay. So if you're still making money

Starting point is 00:24:38 and you think you're just going to get a discount, probably save yourself the phone call to the 800 number on Google. Yeah. And by the way, but that does bring up, but you can get an installment arrangement with the IRS pretty easily. Yeah. They'll just say it. Because I mean, the thing is, and not to say, I have done this in the past when it, I guess

Starting point is 00:24:58 it was maybe, what year was this? There was a time when real estate, estate might have been 2008 or whatever it is i think i ran a balance because i looked at it like you just said earlier it was like dude this is a half percent a month this is the best credit line i'm going to get yeah i couldn't it's when the banks were kind of frozen and i was like oh it's the real estate guys who look at it that way i'm like am i really in a hurry to pay this off right now? But it's churning to 6% of, 6% a year. This is pretty good interest rate. I can use this money, make it back.

Starting point is 00:25:29 And I think I did. I'm not advisable. Don't do that. Don't lever your tax bill to create, to flip properties. That's a bad idea. But, but yeah, that's just something I can, I mean, I'll admit it. I did it in 2008. Let me tell you, I've never known a real estate developer.

Starting point is 00:25:44 For example, I deal with a lot of real estate developers have over my career. I've never known that one that would pay any tax, any of their tax bill before October 15th, which is the extended due date. That is the date they pay it because they like the loan. So just so you know, it's not criminal. It's just a civil penalty. It is a legitimate choice that you have to borrow from the government until October 15th. Now, if you don't pay it by October 16th, you owe those failure to file penalties back to April 15th. So in other words, if you're one day late, you're six months late. So don't be one day late.

Starting point is 00:26:27 Don't be one day late. Got it. Okay. So you can borrow the money from April 15th or 16th to October 15th, but not after that. That is correct. Actually, just don't borrow money. Just don't do that. It's bad.

Starting point is 00:26:41 Somebody's going to do this and be like, I heard about it. Make your estimated payments for sure. And now I'm in trouble. That's it. So what are some of the things that people miss when they're things that shit like, again, fair game in the tax code. What are the most common places where you guys see and wind up saving people money? Well, I'll give you two of them right off the bat. So in your industry, the number one thing is, is that you guys broker, you guys sell a lot of real estate, but a lot of you don't own a lot of real estate. And you are what we call, and under the tax law, you're a real estate professional,

Starting point is 00:27:11 which means you don't have the same restrictions the average person has when it comes to taking losses, like from depreciation, which is the king of all deductions, as I say in Chapter 7 of Tax-Free Wealth. It's the king of all deductions. You're not limited on taking that depreciation. You can do the cost segregations. You can do all of that, get the bonus depreciation because you're a real estate professional, because you're a broker, okay? Or you're an agent, agent or a broker, same difference from a tax standpoint. So that's the biggest mistake that real estate agents and real estate brokers make is they don't own their own investment real estate. That's number one. And that's a big one. And that's the biggest mistake that real estate agents and real estate brokers make is they don't own their own investment real estate.

Starting point is 00:27:46 That's number one. And that's a big one. And that's why I say, I always tell people that there's three questions your tax advisor should be asking. If they're not asking you these questions, then you probably need a different tax advisor. The first one is how do you make your money? Which a lot of tax advisors will ask you that question. But the second question is what are you going to do with your money and that's actually a bigger question and then third

Starting point is 00:28:08 question which i never hear anybody outside of the um you know my circle ask is what do you do with your money when you die because that also has it can have a big impact on your taxes um but um so that's you know that's the second thing is they get a tax advisor. Number one, in your industry, they don't own their own real estate. Number two is you're trying to do it yourself on a tax or you're trying to go cheap on your tax advisor. That's the second big mistake. I would say the third one is actually they get talked out of a home office. They get talked out of a home office. They have a business. They may have an office somewhere else, but just because you have an office somewhere else doesn't mean you

Starting point is 00:28:49 can't have a home office. That is false. That changed in 1997. So if people say, well, you can't have more than one office, they are like 30 years, literally 30 years behind the times. Okay. So that, um, so having a home office, here's why that's so important because your first drive of the day, let's say you're a real estate agent. First drive of the day is a commute, not, not deductible. So your car is not deductible. That first drive and the last drive home, not deductible. However, if you have a home office, your first drive of the day is 30 feet from your kitchen to your home office. And your last drive of the day is from your home office back to your kitchen. So you make sure that you start your morning at your home office, you end your day at your

Starting point is 00:29:32 home office. And then that first drive out to that first client, deductible. The last drive home, deductible because you're going to your home office rather than having the client be your office. Well, it's interesting you brought up driving because obviously realtors have to have a nice car. We've seen million dollar listing. You can't feel I'm a nice car. You can't do it. Let's talk about the advantages of leasing versus buying. All tax. So right now, unless you're driving a big SUV or a big pickup truck, leasing is by far the better tax

Starting point is 00:30:09 benefit by far. I have a habit of buying cars, but I lease cars. So I just leased a new car. And the reason is because I get practically 100% business deduction for the lease payments. Whereas if I buy the car, I'm very limited on my depreciation on a regular passenger vehicle, much better tax deduction on a lease. And then after, if the lease is up, you want to buy the car, buy the car, that's fine. But for the first three to five years, lease the car. I normally, what I'll do is I lease to a dollar. So the residual on the back end is a dollar. If you lease to a dollar, it's not a lease. You bought it. I bought it. Under tax law, that's not a lease. That's a purchase. That's called a capital lease. Okay. So what do you have to do then to make, so what should be doing instead so instead you would lease to like a residual to the normal residual okay and that

Starting point is 00:31:11 and then buy it so what's the difference so how do they estimate the first so let's say you lease it for three to five years right typically a typical lease is three, four, or five years, right? So you lease it for, let's say, three or four years, and you lease it until, but they're still a residual. So you're getting to get 100% of those lease expenses as a deduction. When you buy it, now you get depreciation on that, and you still get your ordinary expenses. You're just buying it at a lower price. Well, what's funny is a lot of real estate people are scared to lease cars because of how much we drive. They're like, oh, I'm going to do $12,000 a year because I'm going to do it. Not understanding that at the end of the lease, you don't have to turn the car in. You can trade it in on something else. Or you can buy it.

Starting point is 00:31:59 Or buy it. You don't have to get... Exactly. You don't have to. But you're right. If you're driving don't have to exactly but but you're right if you're driving 30 000 miles a year you want to buy the car i mean forget the tax issues the cost is so much more to lease a car when you're driving 30 000 miles a year than to buy you always want to buy okay all right i'm thinking about other things so uh i'm sorry if this is all in real estate talk but i'm thinking'm thinking about things that people in real estate would buy.

Starting point is 00:32:26 I'm wondering how far they can push legally, you know, writing stuff off. Let's say custom suits. What says you? So here's the rule. They're actually a very specific rule. You have to have your logo on it. You have to deface the suit. Going to be inside?

Starting point is 00:32:44 So not necessarily. So i have a client i he asked me if it worked i said i think it absolutely works he put a lining he actually put a lining in his jacket that was his logo throughout the lining the whole lining was his logo i'm going i think that works it's, it has to be a uniform. So it makes it a uniform. But like, for example, you go buy a suit off the rack or you go buy a tailored suit. It's not deductible. So, but yeah, you can't buy it off the roof. I mean, look, I'm a big tall, lanky dude. I can't buy suits off the rack. Even if you get a tailored, even if you get a tailored, unless your logo's prominent on it somewhere, it's

Starting point is 00:33:27 not a uniform. It's got to be a uniform. The lining is a good move. The lining, that was, yeah, I'm always learning from my clients, right? I think the lining is a really smart idea. The lining, and dude, any custom suit guy can make anything you want on the inside. Oh, absolutely. Absolutely.

Starting point is 00:33:44 Anything, which is good. Okay, what else? What else should I be thinking about writing on? So here's the big one. So people always ask me if something's deductible. Like, you know, they'll look at my mug and they'll say, is that mug deductible? I mean, wrong question. Let's change the question.

Starting point is 00:34:00 You get a better answer. Let's ask the question, how do I make it deductible? Because if you ask me if something's deductible, my answer is, I don't know. I don't know your situation. Because I always say, if you want to change your tax, you have to change your facts. If you want to change your tax, you have to change your facts. So I can make anything deductible. So the question is, let me give you an example so I had a client who used to travel to New Mexico all the time just because he liked New Mexico mm-hmm said well what do you do over there well I do all sorts of stuff

Starting point is 00:34:34 over there I said so he is in real estate like different he was in contracting not not a broker I said here's what you need to do spend more than four hours a day during the work week. Spend more than four hours a day looking at real estate over there. And I said, you do that, your travel's deductible. Now, a lot of times you want to go on vacation. You want a vacation. You don't want to work. You don't want to do four hours a day looking at real estate or whatever you're going to do, meeting with clients, et cetera. But he did it. He came back to me. He goes, he was very excited. He says, guess what? He says, I found a deal. I said, great. I said, what's the benefit of the deal? He says,

Starting point is 00:35:14 I'll make a million dollars on this after all costs. It'll net me a million dollars. That's the whole reason that the government allows that travel to be deductible because they're going to get a piece of that million dollars that he makes. And so you got to think of it this way. The government's your partner, whether you like it or not, your government's your partner. The question is, what kind of partner are you to the government? Are you a silent partner? Are you an active partner? Most people are silent partners with the government. They just let the government take their money. Whereas an active partner is going, okay, what would the government like me to invest in? How would they like me to invest my money? How would they like

Starting point is 00:35:52 me to spend my money? And if I do something the government wants me to do, whether it's solar energy on my real estate, which by the way, big fan. So if you're in the right location, solar energy on your real estate projects, solar energy, whether it's a real estate, whether it's a business, whether it's agriculture, those things are in my second book, The Win-Win Wealth Strategy. But if you're doing what the government wants you to do,

Starting point is 00:36:20 then the government says, look, we'll give you a tax break because we want you to do that. And our reward is you make money on it we're going to get a piece of that so it's a pretty good deal for actually it's a very good deal for the government it's actually a better deal for the government than it is for the taxpayer so it's not aggressive at all it's actually exactly what the government wants you to do so for example the travel okay if you're spending um four plus hours during the work week and you're actually doing business and you're doing it in such a way that you expect that travel to make you money the government's good with that because they want they want you to make money

Starting point is 00:36:56 because they get to tax that money that you make so they're good with that. Again, they still look at does the expense produce income, if the expense produces income and you document it properly, it's probably deductible. Well, let me ask you this, because that you know, you talk about travel. And that brings up an interesting topic that I know people are big on, I want to talk about your kids. And I want to talk about operating them into your tax plan, because Oh, yeah, for sure. You love love is employing your children, paying them X amount of dollars and then paying for all of their ballet lessons and lacrosse practice and paying all of that stuff out of their own money that you're paying for them.

Starting point is 00:37:34 And also listing them as officers on your LLCs. So tell me what your thoughts are on that. I don't do that. I'll take those two are separate. Okay. So paying your children is encouraged by the government, having your children work in your businesses, but they have to actually work and they can only get paid a fair, fair amount, a fair, fair market amount for their services. What's the $10,000 a year? Why is that? Okay. So, so, so they have, so here's, so we all get this standard deduction, right? It's almost $13,000 now, right? It's $13,000. So they get that standard deduction for earned income only.

Starting point is 00:38:15 So if you pay them up to $13,000, they pay zero tax. Now if you pay them another 10,000, they're going to only pay 10% on that 10,000 extra. So don't think that you're limited to that 13 000 you're limited to what the fair market value is of their services but like i had a i have a buddy who's a surgeon and uh he does a lot of real estate and he has he taught his daughter when she was eight years old how to do do his bookkeeping. And she learned how to do bookkeeping. She is now, by the way, at a big firm on Wall Street. That's where she is. Well, she started doing bookkeeping for a dad's real estate when she was eight years old. So the government likes that. The government's all for that. Now, the fact that they are an officer doesn't mean they get

Starting point is 00:39:04 deductions. Okay. They actually have to be involved in the business just like they would be if they were employees. Well, the question that I had by that is I've heard that if you have your kids as an officer, you can have your annual officer's meeting on vacation and make it tax deductible. That's something that there's lots of people- Again, you would have to spend four and a half hours per day every day doing business that can only be done in that location. Okay. So in other words, it couldn't be done at home. So getting that travel-

Starting point is 00:39:40 That's probably a myth then. To a large point, to a large part, I've heard people say well my my kids are officers and so when we go out on the boat um we you know we talk about business and therefore the boat's deductible probably not because there there's there's four tests for deduction the first is is that um is that does it have a business purpose you might meet that test the second question is is it ordinary meaning is it typical in your business to do that the answer to that one being no it's not typical so I don't know how you're gonna get through the typical part the ordinary part next is is it necessary

Starting point is 00:40:17 can you say that that's really a necessary expense probably not so you're gonna lose two of those right the fourth one is it has to be documented. But I think that's a very aggressive. Here's what I believe. I actually believe you don't need to be aggressive to eliminate your taxes. I think you can be very, very conservative as long as your tax advisor truly understands the law. So a lot of people do try to run off boats. I've never tried to do that. I've never even bothered to go down that road because I just don't think I can get there. Is there any way to run off a boat? Oh, sure. I mean, let's say you had a fishing boat that you chartered. That's a business. That's a business. Let's say that the only time you used it was to take clients out on the boat.

Starting point is 00:41:05 The problem with that is it's entertainment. Entertainment's not deductible. So I think it's a very big ask to write off the boat. Now, could I show you how to write off the cost of the boat, which is different than writing off the boat? And the answer to that is yes. Okay. off the cost of the boat, which is different than riding off the boat? And the answer to that is yes. Okay. That is actually chapter nine of the win-win wealth strategy, where I actually talk about how to get the government to pay for your Ferrari. So if they can pay for your Ferrari, they can pay for your boat. Okay. Now I got to know, how did you do it?

Starting point is 00:41:41 You're just going to have to read. You're just going to have to read the book. It's a long it's a long explanation it's too long it's a long process okay cool i got it um all right so employing the kids to do that is a wise idea writing the boat off absolutely 100 not necessarily a good deal yeah because because you can do that really at any, and if you're thinking, well, I just started out, I'm only making 75 grand a year, your tax rate is going to be different than under 13. Well, it's more than zero. If it's more than zero, then why wouldn't you? Why wouldn't you do this? And keep in mind, you don't have to give them the card.

Starting point is 00:42:19 It's not something you have to do. Something that we that we do that i heard and i don't know maybe you tell me this terrible idea but we made our kids authorize users on every credit card account i have i mean they don't have a card obviously but we did that when they were very young to try to build their credit and build those things as we were going along for them um i actually had my kids own real estate when when they were when they were kids we just did it we just did it through a trust um and because they can't own it right on their own because they that's avoidable contract but um but we we built my kids had 800 credit scores by the before they while they were in college they had 800 credit score that's that's the goal and then hopefully they want to watch it absolutely why not with those

Starting point is 00:43:05 people standing around on freshman orientation get a free credit card we'll give it to you yeah they know exactly what they're doing uh next question i'm a big fan of the infinite banking system uh through insurance policies in the closed loop being your own bank on a whole life that you pay back i'm a big fan what says you on that that is chapter seven of the win-win-wilt strategy i devote a whole chapter to insurance insurance is one of the seven investments the government will pay you to make i i i have a whole life insurance policy myself i like it i like the idea of having safe money everybody needs safe money money, right? This is not money that's making a lot of money, but it's safe money. And I like the ability that I can actually

Starting point is 00:43:51 use it as collateral. I get an automatic loan from the insurance company when I want at a predetermined interest rate. And if I use that money to invest or in my business, I get to deduct the interest. And at the same time, I'm deducting that interest payment. The insurance, the cash surrender value is growing tax-free. So where you can't do that in a 401k because you're actually paying yourself that. You're actually paying it to yourself. But with the insurance company, you're actually paying the insurance company. Okay. It's, it's a loan, um, collateralized,

Starting point is 00:44:30 not a loan of your, in your cash or undervalue, but it's a loan collateralized by your, uh, cash or undervalue. It's a very important difference from a tax standpoint. And then of course the proceeds when you die are tax-free. So I'm a huge fan as well. And I walked through the whole thing. I have a really good example. I walked through it in chapter seven. Well, okay. So let's talk about the book because it's obviously there. How do they find the book? Where can we buy the book? Amazon, Barnes & Noble, all the bookstores have it. Tax-free wealth, fortunately, has been number one in the tax categories since 2012. And we just did the third edition.

Starting point is 00:45:11 So it's in Audible. It's an e-book. It's number one at Amazon. You got to get it in your hand. It's a tax book. You can't listen to it. Who's going to listen to that? You know, it's interesting. Um, about 50% of the buyers and we sell a lot of

Starting point is 00:45:29 books, not a lot of books make money. We actually make money on this book. Um, and, uh, a lot of people listen to it. I can't do it. I need it in my hands. I want to highlight, I want to, I want to bend the corners of the book. Yeah the corners down. I want to mess with it. I've done podcasts where I had a guy just the other day that he'd been through it three times. He showed me his book and it was completely tattered and torn. I'm going, that is the right use of that book because it was written for the average person. It was not written for CPAs. Yeah. It's a user's manual, it's a user's manual. It's a user's manual.

Starting point is 00:46:08 Think of it this way. The tax law is a roadmap to reducing taxes and building wealth. But you got to know you need to be able to follow that map, and most people can't follow it. Tax-free wealth just makes the map easy. Well, I also want to talk about WealthAbility, which is the franchise that you're doing now. So tell us about that. Yeah. So we are, to my knowledge, the first,

Starting point is 00:46:31 but what we decided was as an entrepreneur, it's much better to have another entrepreneur serving you because they'll understand you. And the problem with the big firms is that they have a bunch of employees and they don't have entrepreneurs serving you. In the problem with the big firms is that they have a bunch of employees and they don't have entrepreneurs serving you. In fact, even the partners are employees. They're just highly paid employees. So you don't have any entrepreneurs in those big firms except for the top guys, right? And they're not going to deal with you. So I love the idea that we have entrepreneurs serving entrepreneurs. They're franchisees, which means that they follow our system. We're teaching, you know, like I'm talking to them today. I talk to my franchisees pretty much every week and I'm training them so they know Tax-Free

Starting point is 00:47:13 Wealth. We have a whole series of courses. They go through them before we ever turn them loose on a client. And so I love my franchisees. They're amazing tax professionals. How many locations now with WealthAbility? How many do you have? So we have right now, we have 10 franchisees in a corporate location. But we actually look at...

Starting point is 00:47:37 So one of the things we've done with the franchise is we have some franchisees that handle people just starting out. We have other franchisees that handle people that have leveled up from that. Then we have other franchisees that handle people just starting out we have other franchisees that handle people that have leveled up from that then we have other franchisees that handle top level so that's the nice thing about being in the wealth ability franchise system is that you talk about leveling up you can do it within the same system and we're the only place you can do that well tom man that is a uh you are obviously a wealth of knowledge, my man. And, uh, and it's, it's knowledge that everybody needs. I mean, look, wherever you are on your journey, you probably write a tax bill. Uh, if you're listening to this show, you probably pay taxes.

Starting point is 00:48:16 You're probably, or hopefully on your way to pay in taxes or supposed to pay taxes. So if you're not doing this by the book, uh, do that. Um, you're based in Tempe. if you're not doing this, buy the book, do that. You're based in Tempe. If you live in Tempe, you should definitely be looking up for you. Where are your franchises? We have clients all over the world. So it doesn't matter where you live. We can take care of any state. I actually taught multi-state taxes at Arizona State University. So we're pretty good at all the different states. And what's the easiest way for them to connect with you? Just go to wealthability.com. And you can connect with them. Wealthability.com. Thank you so much for joining us today. I appreciate it. And guys, listen,

Starting point is 00:48:56 again, as we always sum it up, if you are drifting along with the currents of life, and dude, I got to tell you, if you're drifting along with the currents of taxes, believe me, you will get a hard, stern wake-up call one day when that happens to you. So go ahead and just swim against the currents, especially when it comes to paying the U.S. government. Because remember, the tax code is huge. The majority of it tells you how to not pay taxes, not just pay taxes. So take advantage of that. We'll see you next week. What's up, everybody? Thanks for joining us for another episode of Escaping the Drift. Hope you got a bunch out of it, or at least as much as I did out of it. Anyway, if you want to learn more about the show,

Starting point is 00:49:36 you can always go over to escapingthedrift.com. You can join our mailing list, but do me a favor, if you wouldn't mind, throw up that five-star review, give us a share, do something, man. We're here for you. Hopefully you'll be here for us. But anyway, in the meantime, we will see you at the next episode.

Escaping the Drift with John Gafford - Optimizing Cash Flow and Expense Management with Tom Wheelwright

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