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You can’t avoid them, but you can lower, reduce, and defer taxes. Here’s how.
Taxes annoy dentists. They bother most people, but they really seem to irritate dentists. On this episode of the Dentist Money™ Show, Reese and Ryan explain why you may need to rethink your approach if your contempt for taxes affects the way you invest.
The kids are back in school, and it’s a great time to get back to the basics of tax planning before the end of the year creeps up on you.
Reese Harper: Hey everybody, Reese Harper here and welcome to another episode of the Dentist Money Show. This week Ryan and I talk about taxes. We talk about how to not let the tail of taxes wag your investment dog. Sometimes people make decisions with their investments solely based on the tax benefits that they’re going to receive. Or if not entirely based on that logic they definitely have too heavy of an influence.
Reese Harper: This week we talk about what type of taxes you can control, the way to think about your tax planning, and in our experience what the major ways are that you can actually lower or reduce or defer your tax rate. Thanks again for tuning in, I hope you enjoy the show as much as I did.
Announcer: Consult and advisor or conduct your own due diligence when making financial decisions. General principles discussed during this program do not constitute personal advice. This program is furnished by Dentist Advisors, a registered investment advisor. This is Dentist Money. Now, here’s your host, Reece Harper.
Reese Harper: And welcome to the Dentist Money show where we help dentists make smart financial decisions. I’m your host, Reece Harper, here with my trusty old co-host, sir Ryan Issac of Glenmoor.
Ryan Issac: Oh, of Glenmoor. For all those who don’t know where I hail from, I hail from a… what would you call that in like, medieval times? Where a knight would come from. A knight-
Reese Harper: It’s like, some kind of village. Some kind of a-
Ryan Issac: Some province. The province of Glenmoor.
Reese Harper: The something of Glenmoor. Yeah.
Ryan Issac: Just a little old, sleepy…
Reese Harper: The shire. You’re-
Ryan Issac: Yeah, the Shire of Glenmoor. I hail from the Shire of Glenmoor, which is a really cheap, old golf course in the suburbs of Salt Lake City, and had many a good summer night on that golf course, running around.
Reese Harper: That’s a solid course.
Ryan Issac: You played it?
Reese Harper: If you haven’t ever played it, yeah. You head out to the Shire of Glenmoor.
Ryan Issac: It’s like, $7.
Reese Harper: Play the back nine. It’ll take you for all you’ve got.
Ryan Issac: Yeah. Well thanks for the shout out to Glenmoor, that’s where I hail from, that is my shire. That’s where Sir Ryan hails from.
Reese Harper: What are we going to chat about today? I mean, it is got a little golf theme.
Ryan Issac: Well today… The theme today, we got a little bit of a theme. And actually, today’s theme is back-to-school. Back-to-school because it’s nuts. Are your kids back in? They’re back in, right?
Reese Harper: Yeah.
Ryan Issac: Everyone’s back to school.
Reese Harper: Yeah, this was a solid week. I’m doing homework every night for like, two hours now.
Ryan Issac: I know, you forget about that.
Reese Harper: Because I care.
Ryan Issac: You’re a good dad. So back-to-school, we’re going to talk about… You know when you go back to school, what do you think about when you hear, “Back-to-school?” What things come to your mind?
Reese Harper: Girbauds 00:02:37.
Ryan Issac: Did you have any? I had one pair. I had one.
Reese Harper: Like, I had to go buy a pair of Girbauds when I was in like, seventh grade so I was like-
Ryan Issac: Did you have any Guess? Did you have Guess jeans?
Reese Harper: Yeah, I had Guess.
Ryan Issac: I had Guess overalls.
Reese Harper: No Fear T-shirts. No Fear T-shirts come back to mind.
Ryan Issac: No Fear T-shirts. Hypercolor? Did you have any Hypercolor T-shirts?
Reese Harper: No, I wasn’t into that.
Ryan Issac: Okay.
Reese Harper: But I mean, you’re a year or two older than me.
Ryan Issac: You had Girbauds, man, that’s taking it back though.
Reese Harper: Yeah, what else comes back to mind, like, late-night hangouts?
Ryan Issac: Maybe. Actually let me ask this question. What is your earliest back-to-school memory as a kid? Like, can you think of what you wore or like, standing there with your backpack? Do you have any early memories?
Reese Harper: Yeah.
Ryan Issac: What’s the earliest one you can think of?
Reese Harper: Yeah, I just remember being on the playground with the kids that made fun of me sometimes. Sometimes I fit in, sometimes I was the cool kid, sometimes I was the lame kid. And falling on my back a lot off the jungle gym monkey bars. Or, I think I remember having a backpack on and someone pulling on my backpack while I was trying to cross the monkey bars-
Ryan Issac: Just hit the deck.
Reese Harper: And then just slamming into the ground. I remember that. And we had only dirt underneath the monkey bars and so… and the dirt, there was like, a pit because water was there too. And it would just like, get hard as a rock, kind of like a hole. That was the jungle gym monkey bars. That’s my memory… childhood. How about you?
Ryan Issac: That’s an early memory. I’m trying to go back to that, like, how long ago. I remember third grade. So I remember in third grade and I remember having a crush on a sixth grade girl. But she had a boyfriend who was one of my friend’s older brothers. And I went out to recess once after having talked to her at lunch, and then I got what was called a whitewash in the snow. Did you ever get whitewashed?
Reese Harper: Yeah.
Ryan Issac: So you go outside and then the older kid throws you in the snow. And then basically just keeps rubbing your head in the snow and you try to stand back up and they push you down in the snow again. And that’s an early memory. I guess if we’re talking about being bullied-
Reese Harper: And at that time you had a lot of hair and so-
Ryan Issac: I did, I had a lot of hair back then.
Reese Harper: And so it was probably a little less… I was more comfortable with hair getting whitewashed, if it was a bald wash.
Ryan Issac: Can I name names on here? They’re not listening. I remember her name was Mariah. Maybe it was Mariah Carey, that would be really cool. His name was Wes. They were friends of mine eventually. But Wes did-
Reese Harper: Enemies at first.
Ryan Issac: Wes didn’t like that I talked to Mariah and he whitewashed me on the playground by the tetherball. And people would laugh. So that’s my early memory.
Reese Harper: These are our memories.
Ryan Issac: Okay, here’s what we’re going to talk about though today is, you know when you go back to school and you’re kind of like, the first few weeks, maybe month is kind of easy because it’s just the basics. You get your syllabus. You’re going to review, you’re going to do some easy quizzes, you’re just going to make sure you’re like, up to speed with the basics before you move on. It’s like, the easy stuff, you know?
Ryan Issac: So today I thought we should talk about the basics of a really important subject that gets talked about all the time, and there’s a lot of emotion around this. So some things get a little… they get a little fiery, okay? And that is the basics of taxes and investments. Okay?
Reese Harper: Okay, I like it.
Ryan Issac: The basics of taxes and investments. So on this subject, we’re going to switch to kind of… they call it an idiom. It’s just an old saying. You know the saying, “The tail wagging the dog?”
Reese Harper: Yeah I do. I like that. I think I came up with that one.
Ryan Issac: I think you invented that. Although I looked it up, it was actually the late 1880s in the United States, that’s where it came from.
Reese Harper: So almost.
Ryan Issac: Yeah, almost. The principle of the tail wagging the dog is that there’s like, in a big decision there’s some kind of like, sub-category that’s not that important that ends up driving the whole decision when it should not. That’s when the tail wags the dog. And some people will say like, in this context, some people will say, “You don’t want to make a decision where the tax tail wags the investment dog.” Meaning the investment decision shouldn’t be driven by the tax outcome. That shouldn’t be the main, right?
Ryan Issac: And I was trying to think of like, examples where we do this in our lives in other places. Like, have you ever… Here’s the segue, all right? From one of my favorite recent songs, we get a little shout-out. You’re an Ariana Grande fan, aren’t you?
Reese Harper: No.
Ryan Issac: You’re not?
Reese Harper: No.
Ryan Issac: How are you not an Ariana Grande fan?
Reese Harper: Our whole office is a T. Swift, Ariana Grande office. There’s a lot of pride here. Now am I anti? Do I think Ariana Grande’s not a good artist? No.
Ryan Issac: But you’re not with it.
Reese Harper: You just asked me if I was an Ariana Grande guy.
Ryan Issac: Yeah I did.
Reese Harper: I’m a Neil Diamond guy before I’m an Ariana Grande guy. I’m a Bob Dylan guy. I am a Ben Folds guy.
Ryan Issac: That’s fair. Not an Ariana Grande guy.
Reese Harper: You can’t just be like, “You’re an Ariana Grande guy, right?” No. I mean…
Ryan Issac: There’s a line in one of her new songs, it’s like-
Reese Harper: Top 50. Yeah.
Ryan Issac: One of my favorite new songs out called 7 Rings. It’s to the tune of some of My Favorite Things from Sound of Music. It’s that tune, right?
Reese Harper: I heard that tune.
Ryan Issac: But there’s a line in there where she says, “I bought a crib just for the closet.” Because she’s talking about how much money she’s got, she’s spending. But she’s saying that she bought this whole house just because the closet was cool.
Reese Harper: I get it, yeah.
Ryan Issac: And that’s the point of the dog and the tail and the back-to-school basics. And now-
Reese Harper: So you’re saying you can’t buy the house because of the closet, but what if it was like-
Ryan Issac: Well you can if you’ve got the money, but you have to admit that that’s a waste.
Reese Harper: When is it a big tail? Like, I bought the crib because of the kitchen. Is that enough for you?
Ryan Issac: That sounds like a bigger tail. But it’s all preference though, too. And you got to see like, what’s the outcome you’re pointing to here?
Reese Harper: All right, what about I bought the crib because of the yard?
Ryan Issac: I imagine Ariana’s closet was probably pretty big. It was probably the size of a… it might have had a kitchen in it.
Reese Harper: And it’s highly functional for her.
Ryan Issac: It might be. It might be.
Reese Harper: She probably uses it a lot. Her closet is akin to your podcast office studio in your home.
Ryan Issac: Oh, it’s probably a lot bigger than that.
Reese Harper: One of the reasons that you bought your home though is because you could have a cool location for you podcast studio.
Ryan Issac: It is cool, it is cool. Yeah, I have… like, the pool’s outside my window here, it looks cool. Makes me feel good and happy.
Reese Harper: So you and I and Ariana Grande aren’t too much dissimilar after all.
Ryan Issac: We’re pretty similar, we can get into that in another podcast because I feel like there’s some deep philosophy there. Here’s what I want to do today, okay? I’ve got four… How many do I have here? I have three areas where dentists are commonly letting the tax tail wag the investment dog.
Reese Harper: Or the close wag the house dog if you will.
Ryan Issac: Or yeah, the closet wags the crib, you know? You got to be careful.
Reese Harper: Yes, okay, I see where you’re going.
Ryan Issac: But Grande knows, all right? Grande knows. Okay, but before we get into that I want to like, kind of get into an argument about this. Not me and you an argument, an argument that’s common when you hear about this. And it’s the same type of argument, it’s the same line of thinking or reasoning when someone says, “Well Warren Buffet’s doing this. So like, why can’t I just be Warren Buffet? Like, he does it so why can’t I do it?” And the line of thinking is this. “I heard that,” insert any name of any rich hedge fund manager or like-
Reese Harper: Peter Thiel.
Ryan Issac: Private equity-
Reese Harper: Mitt Romney.
Ryan Issac: That’s a great example because his taxes-
Reese Harper: Peter Thiel, Mitt Romney, Warren Buffet, Bill Gates.
Ryan Issac: Let’s talk about Mitt. Because he was a presidential candidate and his tax returns and his tax rate was a big thing a few years ago if you remember that.
Reese Harper: Yeah, it wasn’t that low. But yeah, okay, moving on.
Ryan Issac: I know. So you’ll hear this argument like, “Well he made $17,000,000 that year and he paid a lower percentage of his income than I do as a dentist. So clearly there’s something I can do or I should do.” Okay? That’s one argument, you’ll hear that.
Ryan Issac: Along with that you always hear that someone’s got a friend, “I’ve got a friend, he makes way more money. She makes way more money than I do but pays way less in taxes.” You always hear those two arguments all the time.
Ryan Issac: So I want to begin there, with like, let’s just maybe dissect a little bit of the argument that the rich private equity manager, hedge fund manager is different than the dentist. Or the accountant or financial planner, in like, business, income, taxation. I mean, we don’t have to like, specifically talk about any individual. Like, “Why did Mitt Romney pay so little in taxes?” But let’s just talk about this like, I feel like there’s always this mysterious friend or rich person that someone always inevitably knows that makes more money and pays less in taxes. And like, what do you say when you hear that? Like, “Reese, I shouldn’t be paying this much in taxes because my friend makes more and pays less.” And you hear that a lot.
Reese Harper: Yeah. I’m just like, I think most people if they heard the truth about why that person paid lower taxes… For example, there are, in a C corporation, if you start a start-up business, not a service company, not a dental practice, not a service related business. It could be like, e-commerce, it could be a product. If you’re going to take the risk and start a company and you do it inside of a C corporation there’s a lot of tax benefits to doing that. One of them being, up to a certain amount of income or capital gain from your original company’s value is excluded from… You essentially don’t pay any tax on some of the sale of your business. And that’s if it’s inside of a C corporation.
Reese Harper: And so a lot of people that already have a ton of money might be able to start a C corporation and build a piece of software, build another type of business, and be able to sell that for very little down the road. Or very little tax down the road. Like, Mitt Romney, that happened several times. It also happened where he sold his ownership in some, we’ll call them investments that he was in, where he was taking advantage of something called the Carried Interest Rule, which applies to portfolio managers or hedge fund managers specifically. Or ownership position you have in a business where you’re raising money to fund its growth through a few other types of vehicles that are really… they’re not overly complicated, but it’s more like a management fee that you’re taking, then you pay a lower rate on that kind of income than you pay on ordinary income out of your dental practice.
Ryan Issac: But it is what it is. If you have a career where you’re income is made by buying and selling assets, like say real estate or businesses in a private equity firm or a hedge fund, you just get taxed differently on your income than if you build a killer dental practice and make a million bucks in net income every year. It just, it is what it is.
Reese Harper: Yeah I mean, that’s the truth, yes. So the moral… I’m trying to like, just make sure people feel like, we feel you, out there. That you’re like, “Why does Mitt Romney pay 14% effective tax rate and I pay 35%?” Well a lot of people to get to the point where they’re making 15 to 20 million dollars a year, they’re doing it in a way that lets them take advantage of lower tax rates. That’s maybe how they got their income so high in a lot of cases. But there’s cost that they pay too in those scenarios, that might have been higher tax rates earlier in their career because of what they were trying to do.
Reese Harper: For example, that C corporation benefit I was talking about where you can sell your C corp and have it be excluded from income tax if it qualifies, as a qualified small business, QSBS treatment, that a lot of times you’re setting up a C corp, you pay a ton of taxes along the way and you don’t ever get to write off any of the losses. Unlike a dental practice, like, if you open your dental practice, your first five years, and you write off your building and you write off your equipment purchase and you write off the practice acquisition debt and all this, like… You get all this write off expense. Man, if you’re in an LLC that flows through and wipes out your tax completely. You probably had three or four years where you didn’t pay any taxes.
Reese Harper: And the person that started that small software company, that QSBS, they didn’t get any of those tax benefits to begin with. They had double taxation on their income. They paid income tax on their salary at the full marginal rate, and then they also paid another 35% tax on any profits that they took out of the company. If it was a small business C corporation. And that’s a very different tax situation than you might have been in as a service provider or a pass-through entity like an LLC. And I guess usually the government will find a way to get their money one way or another, either at the beginning or at the end or in between. But the truth is our tax system is really complicated and some people have disproportionate advantages based on the industry that they’re in. And I don’t think that’s good, but that is the reality of the situation.
Ryan Issac: So what’s helpful then? Like, what’s helpful advice when someone comes to you and they’re feeling frustrated with their tax burden? And they use a story like that of a famous wealthy person, or they use a story of the cousin-in-law or the friend down the street who they say earns more but pays less, you know? Which always seems to lack a lot of detail in those stories, but…
Reese Harper: Yeah, typically my advice to somebody would be, “We all have to pay different tax rates based on the jobs and careers and ways that we earn our money. But most of us are paying the same, and very few people have tax breaks like what you’re talking about.” And so if you want to pursue tax breaks, then you just need to get out of the industry you’re in and go into a different industry. And go into a different career. Because some of those tax breaks won’t be available to you unless you change industries.
Ryan Issac: Okay, so let’s go to three different kind of scenarios where we see decisions being made where like, the taxes are kind of driving the whole decision, you know? The investment quality or appropriate fit is taking a back seat to the taxes?
Reese Harper: The overgrown tail wagging the dog, if you will.
Ryan Issac: It’d be like, a huge tail on a tiny dog. Like, a big golden retriever fluffy fan tail on a little-
Reese Harper: Chihuahua.
Ryan Issac: Dachshund. Is that a-
Reese Harper: Docks-hound.
Ryan Issac: Docks-hound, okay. I don’t know, I don’t know, you know? I don’t know.
Reese Harper: I don’t know, I just have a golden-doodle.
Ryan Issac: We did, that’s a long story. She lives with another family now.
Reese Harper: Oh my gosh, are you serious?
Ryan Issac: It wasn’t working out with us. Yeah, we [inaudible 00:18:02]
Reese Harper: Oh, dude.
Ryan Issac: Should we take a little segue on that?
Reese Harper: You gave away one of your children. No, we don’t have the time. But it sounds like-
Ryan Issac: I’m a bad father.
Reese Harper: It sounds like the dog tail wagged the dad dog.
Ryan Issac: It’s exactly what happened. The dog tail, the dad dog. All right, so scenario number one is where, and there’s a few ways that this can happen but, where somebody will go take on more risk than they should in their situation in order to get the tax break. I’ll just give you some examples and you can stop me anytime and kind of elaborate on any of this if anything comes to mind. So one of them that’s actually kind of common is when we’ll meet someone who’s got… especially like an after tax portfolio that they’ve had for a long time, but is like, really poorly allocated right? Like, it’s-
Reese Harper: Saw one of those today.
Ryan Issac: Did you? Okay, so talk about… Here’s the situation you could talk about that. Like, you meet someone and their portfolio’s just grown weeds in it. It’s just out of control, like, a few pieces grew way out of proportion, some others shrunk. And they haven’t reallocated, they haven’t rebalanced because it would cost taxes to rebalance. You know, you’d have to sell something and pay the taxes. So you stop doing that.
Reese Harper: Example. I’m looking at an account, I’m like, there’s a random Henry Schein stock, a random Dentsply Sirona. Maybe you’ve got another random healthcare REIT. Like the healthcare RIET’s like, 60% of the account and you’re just like, “Where did that allocation decision come in?” And then there’s like, a stock index for like, four grand right next to a private REIT of 50% of the account. Like, I see that stuff all the time. I’m like, “How did this just evolve into this nightmare of a… What advisor could have-”
Ryan Issac: Which is a whole other story, like, why it goes from maybe something rational to something like that is a whole other story.
Reese Harper: It’s like, the speculation of Hades and Zeus. It’s just like, I was really lost.
Ryan Issac: The Hades and Zeus portfolio? We run that only for special clients.
Reese Harper: Yeah. Anyway, what’s your point?
Ryan Issac: The point is like, that’s one way were people will take extra risk. Like, they’ll leave a portfolio that’s way out of balance, lacks any diversification-
Reese Harper: Oh, just because they don’t want to pay the capital gains tax on any of the sale of the positions. Yeah, I see it. I see it, they’re like, “Oh, we got to wait and see. I don’t want to pay the taxes.” It’s like, then they go five years and the portfolio just implodes, and then it’s like, “You could have harvested the gains at least, and made some money, you know?” It was bad to begin with, this dog was not healthy.
Ryan Issac: It was not a good dog, was not treated properly. What about, you ever see people do… They’ll 1031 from one property into another, not because the second property’s a great investment or they really want it-
Reese Harper: All the time, dude. All the time.
Ryan Issac: But only to save the taxes.
Reese Harper: Yeah, it’s like, “Well I just 1031…” So like, because you have a pretty limited period of time that you have to identify a piece of property to put the money into once you sell a qualified 1031 property. So a lot of time people are… they’re rushing into buying a building, and the price… You know, that’s an inefficient market right there because now price isn’t really the driver, its like, “No price could be too much to pay to avoid this tax. I’ll take whatever.”
Ryan Issac: There is no price high enough.
Reese Harper: Yeah. It’s like, “Okay.” I see that a lot, though.
Ryan Issac: Okay. You see, I was reading a blog from a CPA that works for a really large family office back east. And this guy was the tax, real estate specialist, and these are like, $100,000,000 net worth family offices. But he writes a whole blog on these 1031 mistakes and how often he sees people 1031 into really crappy investments that they don’t even want, just because they’re going to shelter the gains.
Reese Harper: Totally.
Ryan Issac: So here’s another one that’s kind of hot lately is the Wizard of OZ, opportunity zones of course. But when you’re cool you call them OZ, you abbreviate in emails, you call them an OZ. So what’s your experience lately with, I know you’ve had a lot of conversations. We probably have an opportunity zone conversation at least a couple times a month with clients.
Reese Harper: Yeah I mean, number one I’m fundamentally opposed to the legislation around opportunity zones, but that’s a different topic. I think it’s created a massive like… It’d be like carving out, selecting a piece of the economy, you’re like, “You know what? We don’t have enough of that. So let’s just create some interest in it.” I don’t like it when the government does that, whether it’s natural gas… I don’t like it when they do that with… Because you never know, when the government creates an incentive for people to invest in something, you never really know if they’re investing in it because it’s a good thing and sustainable. Like, if it’s going to actually be… Like, what if a part of the city that is an opportunity zone is just kind of a bad area for a reason. Like, traffic patterns fundamentally don’t support commerce in that area.
Ryan Issac: Infrastructure was never built correctly.
Reese Harper: Or there’s just not enough population density right there.
Ryan Issac: Natural disaster.
Reese Harper: Or there’s like, a lot of contamination in the groundwater or… You know, there’s just a lot of different issues. But then the government targets that as an opportunity zone, just like, “There’s no parks here and this is a bad area, and we’ve got to fix it.” That could be good. But it could also be like, 25 years later, after you reinvigorate this area it kind of reverts back because the reason it was a bad market has not changed.
Ryan Issac: Like, more capital invested didn’t alter the real underlying problem.
Reese Harper: Yeah, and we see that with wind investment, right? The government has tried to incentivize wind investment consistently. They’ve tried to incentivize electric vehicles. But until someone came around with a capitalist perspective, you know, in Tesla-
Ryan Issac: And built a great vehicle.
Reese Harper: And built a car that was really expensive and wasn’t… Like, when people buy a Tesla they’re not like, “Oh, but the tax benefits make it worth it.” It’s like, they’re buying it because they’re like, “This is a cool car-”
Ryan Issac: They’re buying it for that button.
Reese Harper: “I like it and I want it to go fast. And I don’t want to spend money on gas, I think I could like, break even now on this because the battery life is pretty good.” But they’re not like, because of the tax benefit.
Reese Harper: And so you’d see like, how… It’s arguable, the government has spent trillions I bet, on subsidies for electric vehicles. I’ve seen them, I mean, my clients have taken advantage of the electric vehicle tax credit to basically put free golf carts in their houses, for years, right? Because it’s like, there were just so many loopholes with the electric vehicle rules, and then what do you do? You end up creating a market and people don’t… It’s not a sustainable market until someone comes around with a sustainable product.
Ryan Issac: Because there wasn’t like, a capitalistic incentive that drove demand first.
Reese Harper: Yeah, and until there is you don’t have a market.
Ryan Issac: Like, interest, like, real interest.
Reese Harper: Yeah, you don’t have a real market. So opportunity zones to me are like, it’s great. Like yeah, you don’t have to pay capital gains taxes if you can hold it for 10 years, and you can defer your gains. And you know, it’s all these great tax incentives. But if the thing’s a dog investment because of the area that it’s in, or… You still have some risk there.
Reese Harper: Now some of you listening to this are like, “But I know the area that I’m going into is like, really good and trust me, it’s there. I have my dental practice is going in there,” or whatever. I’m not saying there’s no scenario in which this doesn’t make sense for you.
Ryan Issac: Yeah for sure, because of course there is. Of course there are.
Reese Harper: Any time the government does something stupid, half the people make a lot of money and half the people suffer from it. So yeah, I mean, take advantage of it. Like, if you’re in a spot that makes sense and… But like, if you’re the person that’s like, jumping on this bandwagon because of the tax benefit, just know in many cases, half the people doing this right now will just be upside down and it won’t make sense, and the other half will have made more than average. And you’ve just got to be really careful before you do it yourself.
Ryan Issac: Yeah, I’ve been reading some-
Reese Harper: Talk to an advisor like Sir Ryan Issac about it.
Ryan Issac: Yeah, yeah, who hails for the Dunshire of Glenmoor. What’s Dunshire? I don’t know what Dunshire is.
Reese Harper: It’s a combination word you just invented.
Ryan Issac: I just think that it felt right, [crosstalk 00:27:17]
Reese Harper: There was Dunkirk, which is a World War Two…
Ryan Issac: Yeah, I’ve read that book, which is better than the… Movie’s better than the book actually, that was rare.
All right, so we got a couple more. Let’s take a break really fast and then when we get back we’ll hit a couple more of these. Cheers.
Reese Harper: Ryan and I are pretty easy to talk with. And so are our other advisors. Let’s just find a time that works for you so we can start a conversation about how to take control of your financial future. Give us a ring at 833-DDS-PLAN to set up a free consultation, or just go to the website at dentistadvisors.com and click Book Free Consultation.
Ryan Issac: Okay, we are back, refreshed, ready to go. Ready to fight, swing for the fences. Yell a little bit, gloves off. I was having a conversation, this has been a couple conversations recently where people are saying like, “I’d love to do a profit-sharing plan. Just tell me what age of the person I should hire so that it makes sense.” You know? “Should I get a 24-year-old or a 22-year-old? Like, you tell me and then I’ll hire that age.” And I’m like, “Well shouldn’t you just hire the right person and then let the tax benefit come later and see how it shakes out?” But…
Reese Harper: I mean, I think there’s like… My philosophy on taxes is there’s like, a ton of obvious stuff you should be taking advantage of every year. And then there’s like, the things that you’re saying that, if I let myself go too far into tax planning then I actually end up wasting money and time and resources on things that don’t really… I can’t control. Like, you take advantage of a tax strategy one year with your entity structure, and then two years later the IRS comes back and unwinds it. That happens quite often, whether you’re looking at certain types of insurance deferred comp that was sold years ago, 412(i)’s. Captive insurance companies or groups that you might be participating in. Lots of entity structure tax avoidance.
Ryan Issac: That’s actually the next section there.
Reese Harper: I mean there’s like-
Ryan Issac: Yeah, that’s where we’re going.
Reese Harper: These things are like, if you pursue things that the IRS may come back and… If you don’t do something that… Think about the intent that Congress has when they write laws. And if you’re not following that intent you know there’s a chance that they might come back and unwind whatever it is that you’re doing. Like, the government’s not creating… like, if they find that they’re not receiving tax revenue they’ll look at the ratios of certain industries and certain businesses an be like, “Whoa, what just happened here? We put this into place and our tax receipts just went down by 4%.” Guess who’s getting a look-see next year. They’ll pick the vertical, they’ll pick what occupation you’re in.
Ryan Issac: Little looky-loo.
Reese Harper: And they’ll come and audit your space, you know? They’ll audit your vertical. So if the new small business tax deduction that applies after the 2018 tax act, if the new small business deduction results in the IRS not getting as much revenue as they wanted then they will change the tax rates, you know? Congress will change the tax rates. And I just think it’s important to think about whether what you’re implementing is… if a lot of people did that, would the IRS come back and change things on you?
Ryan Issac: Okay, so while we’re on the subject then, because that was the last one I was going to hit, was buying insurance products to avoid taxes. You know? Let’s talk about one that’s… I mean where are we at, September 2019 almost? One that’s making the rounds in a lot of Facebook forums. We’ll just talk about, not the exact… We won’t talk about the company, we’ll just talk about the principal here. It’s like, hitting all the forums, where you set up your practice as a C corp, which is something people used to do decades ago and hasn’t been a practice for quite a while. So you set up as a C corp to give yourself more write-offs, more comprehensive write-offs. And then you pull net profits out of the C corp and what do you do with them? You put them into permanent life insurance products.
Ryan Issac: So that one’s kind of making the rounds, you want to… We’ve received multiple emails on that and kind of shout outs in forums like, “Hey, what do you think about this?” So [crosstalk 00:31:53]
Reese Harper: Man, I’m going to let you respond to this, but yeah dude, you’ve had a lot… I’ve had probably three or four emails on this over the last week.
Ryan Issac: Yeah, it’s kind of funny.
Reese Harper: So have you. I guess, how do you respond back?
Ryan Issac: I mean, in my mind there’s two pieces to this. I’ll start with the last one which is, just ask yourself the question, are you at a point in life where you want your net income to go to an insurance product, you know? If you say yes to that question-
Reese Harper: If you know anything about insurance products at this point, you know? Have you seen how they perform? Have you ever looked at… You know like, I was on Facebook a couple days ago and someone posted and said, “My good friend just overfunded my life insurance policy with him, and here’s what happened. And it’s great, look at these numbers.” And I just like, took the screenshot and I put a little internal rate of return calculator on the right hand side of it and showed him what his rate of return is by year. He thought he was making 8% and the truth is he never made over 3%. And it didn’t to 3% in year 24, and by year 12 he still hadn’t even gotten to a positive return. But he thought he was making 8% the whole time.
Reese Harper: I’ve seen a lot of confusion around life insurance, and when you say, “Oh, but it’s all tax free,” and it’s “Tax, tax, tax.” You know, “We’re not going to pay taxes,” then people kind of don’t…
Reese Harper: Sometimes they didn’t even look at the investment, same way that the real estate guy doesn’t even necessarily look at the target property that he’s rolling his 1031 into. He’s just going, “You know…” It’s the best place to be selling real estate is when you’re selling it to someone who’s rolling their 1031 money into it, because they don’t really care about the price as much.
Ryan Issac: Yeah, they’re not worried about the end results. Like, “Is the tax good? I save taxes? Right.” So going back to the question then, I mean there’s two parts to me. It’s like, the second part of the whole thing is like, put your money in life insurance, which is… I mean, it’s just a new name on the same old crap. Buy life insurance with your money.
Ryan Issac: The first part of it though, it’s just entity structure. And I mean, the thing that gets me is how you can go to like, a mass audience, just go to a Facebook of 10,000 people or whatever and be like, “Hey, you should set up as a C corp.” It’s like, do you know how many different kinds of dentists and businesses are represented in this group of 10,000 people? And to just be like, “Hey, were an insurance company, but let me give you some entity and structure advice,” you know? I mean, who are you talking to? You’re talking to like, the single, two day a week, three chair, single location? We talking DSOs? Are we talking like, I’ve got three locations but a huge management company? I mean it’s just like, silly to throw out that general advice.
Ryan Issac: So I would say, “Look, if you genuinely wonder if your entity structure could be improved and you could have more write-offs through a different corporate type, just go to your CPA, that’s a competent professional who has to…” Which is another pet peeve of mine, like, take the advice from the people who are going to sign their name along with yours when they file forms, legally. You know? Because that’s the person who’s got skin in the game. So go take it there and be like, “Hey, if I file as a C corp instead of an S, what’s the difference here?” Your CPA will tell you. But the second part for me is just this, new name same crap, put your money in life insurance. Which you can Google on our website like, four different podcast episodes about that, so…
Reese Harper: Yeah, and you’re a bitter old man about it. I’m like-
Ryan Issac: I’m just too old to like… you know, I’m too old now. I’m just mad. I’m on porch now, yelling at whippersnappers. “Get off my lawn.”
Reese Harper: If you want to put money into life insurance I’m like, I don’t really care, you know? I mean, it’s not-
Ryan Issac: Wait, I’m usually the nice one, you’re usually the mean one. What’s happening? It’s like, Twilight Zone.
Reese Harper: Go ahead and do it. But you know, 20 years in you’re going to look back and you’re going to be like, “You know, this wasn’t really what they told me. I made about 3% and it’s kind of complicated. And I don’t know.” But it feels like the mecha, and it always turns out to just be like, “Meh.”
Ryan Issac: To be not the mecha.
Reese Harper: Yeah, “Meh.”
Ryan Issac: What about, I mean we don’t have time for like, a full white paper treaty on the subject, but what about captive insurance? We hear this from time to time, captive insurance is, I mean, it’s been run for a long time, it’s a legitimate thing that very large corporations will use when they have insane insurance premiums in private insurance markets and they decide to take some of their profits and basically self-insure. So it applies to some industries and very large corporations. It’s like, a very normal thing in very large corporations. But for years-
Reese Harper: And private companies. Ryan means by that too, large private companies.
Ryan Issac: Yeah, large private companies. All right, let’s wrap this up with some helpfulness, all right? So what can a dentist do reliably, predictably, every year to keep tax rate low? Like, what are some legit things that work really well for dentists?
Reese Harper: Well dude, there’s like a laundry list of things you should be doing no matter what.
Ryan Issac: Yeah, we got 60 seconds, you got to tell everyone everything.
Reese Harper: Oh jeez. Well first of all you should be keeping track and trying to maximize all possible deductions that you can possibly justify. I think a lot of things can be justified, and I don’t think dentists take advantage of everything that they could, that could be justified as a business expense. So I think there are a lot of opportunities for marketing related expenses, continued education, travel and meals and entertainment to be captured in the business P & L, and it’s not often… It’s often forgotten, neglected, not captured, or put on the wrong credit card, or the accounting’s done in a way at the end of the year where a lot of things just get missed. That, number one, making sure you accurately keep track of your books to the point where you’re getting credit for everything is really critical.
Reese Harper: Number two, I think you got to be as aggressive as you can with how you manage your tax rate with your CPA. So when you buy a piece of equipment or you get depreciation expense from buying a vehicle, or you do TIs, or any kind of larger expense that need to be amortized, the smarter you are with how you deduct that, meaning not the… you don’t deduct it always the fastest way. Sometimes it’s a blend between speed and the right duration, and you don’t always want to 179 every expense is what I’m saying. You want to look at your tax rate and make sure that you’re taking deductions that keep your deductions at the best value for you.
Reese Harper: So if this year you’re only going to make $200,000 but next year you’re going to make $500,000 because of all the deductions you took, maybe you don’t want to write your expenses off quite as quickly, and maybe you don’t want to 179 that piece of equipment. Maybe you want to take it on a three or a five year. But a lot of CPAs will just, maybe, feel the pressure from you to get the biggest tax savings possible every year, and they might expense something over a year or two that you should have waited a little bit longer, you should have stretched over a little bit longer period of time.
Reese Harper: So take your deductions against your highest tax rate as often as possible, and don’t take deductions that are on income tax bands that are lower than the highest bracket level, because that’s where you’ll be at most often. Those two are pretty big swings.
Reese Harper: The third thing I would say to help you preserve and save taxes is, don’t pay yourself so much money, okay? This is the big one. But like, If your plan is to run one location that is very different than if your plan is to run two or three. And most small businesses, like I met with a very big dental company today and I was talking to them about how they managed their P & L. And they’re very large, so we’re talking tens of millions a year in sales, and they’re trying to grow still. And I just said, “Well how do you guys manage your P & L?”
Reese Harper: And they told me, “You know, we’re trying to make sure we don’t have any profits at the end of every month, or at the end of every quarter. Last quarter we screwed up.” And this is a business doing tens of millions in sales. “Last quarter we screwed up, we had about $50,000 in excess profit that we generated.” Which is like, what? Like, less than .4% of their monthly revenues. But it kind of bothered them because they paid excess taxes for doing that, right? They should have hired one more person, they should have put that towards a marketing budget. They should have expensed it properly. But they were kind of bothered that they even let one month pass where they had a little bit of extra profit.
Reese Harper: So if you have a growth plan and a vision for how you want to get there, only pay yourself what you need to live a decent lifestyle that you’re comfortable with. But don’t let yourself get paid twice as much money than you need to spend if you’re trying to grow, because if you’re trying to grow you should just only let yourself get paid what you need to get paid, and you should be plowing… You should be looking at your P & L every month and saying, “Okay, if I want to make $200,000 this year,” or, “If I need to have $20,000 of income because I need to spend $15,000 a month,” or whatever it is, then… Let’s say you want $20,000 in total income because you need to spend $15,000. Well then anything above… You know, you don’t want to let yourself make more than that in a quarter.
Reese Harper: So your net profits, when you see a quarter where you have a bunch of profits and you still have growth goals, and there’s an associate you want to hire or there’s a front office employee that you haven’t hired, or there’s a marketing budget or there’s a second location you want to open, or there’s an additional operatory you want to add, just don’t let yourself generate excess profit while you’re in growth mode, as long as you have an emergency fund and as long as you’ve got some basic retirement savings, like, you should just be wiping out your income.
Reese Harper: That’s one where I think dentists could use a lot more guidance and coaching around, because you’re paying excess taxes and then the following year being like, “Oh, I’ve paid a little too much in tax. I’m going to invest a little more this year.” It’s just inefficient. You need to be investing it throughout the year so that you don’t waste excess money on tax if you’re trying to grow.
Reese Harper: And if you’re not trying to grow then the same thing applies. You should be sweeping every dollar you have out into tax-deductible retirement accounts first, to the maximum that you can, and testing how big those can get, you know, from profit-sharing to defined benefit plan tests. And making sure you’re maximizing all your tax deductible retirement contributions and HSA contributions before you… if you’re trying to minimize taxes. If that’s your goal, right? Is tax minimization. But if your goal is to like, buy a house or like, have a couple of big vacations, you’re going to need to pay some taxes because there’s no way to get money out of your company unless you pay some taxes. And so-
Ryan Issac: And enjoy it. It’s okay.
Reese Harper: Enjoy that.
Ryan Issac: You built a great business and a great career, and-
Reese Harper: Yeah, me and Ryan usually say, “Don’t maximize your tax deductions to the expense that you can’t take vacations and enjoy life.” We would say probably what? Like you know, it’s a nice blend there. We typically don’t like to see people take more than half of their discretionary income even towards their retirement plans, because then they won’t have any other money to enjoy life with, you know?
Ryan Issac: Yeah, totally man. I think the moral of all this is like, don’t let the tax decision drive your family life goals, you know? Or your fulfillment goals. Or don’t let the tax decision drive you to make investments or take risks that you normally wouldn’t take, or try to push you down a career path outside of your expertise and what you even love, just because it’s going to be some better tax outcome, you know?
Reese Harper: Yeah, but-
Ryan Issac: Like, optimize for other things.
Reese Harper: But don’t waste money on taxes either. And the examples we just gave, these first three, they’re the biggest options you have. Like, they’re your biggest variables. So don’t waste excess money on tax. But don’t pursue investments because of their taxes and don’t pursue tax minimization at the expense of your lifestyle.
Ryan Issac: Yeah, it’s cool. Okay, so three invitations then. And you know, we just barely got done doing this for all of our clients. One of the twelve elements we hit every year is what we call qualified term, where it’s just a deep dive during one month a year into what everyone’s retirement plan is at the office. And you constantly just want to make sure that it’s the biggest, most efficient plan you can have for that year. And it can change every year, especially when you get into your 40s and 50s.
Ryan Issac: So one invitation would be… Well first of all just join the Facebook group, we get a lot of great questions and a lot of good feedback for the podcast and discussions like this. So Facebook, it’s dentistadvisors.com/group.
Ryan Issac: Number two would be, someone asked me this the other day, he said, “Do you have events? Do you guys do events?” I’m like, “Man, we do more events now than we ever have.” It seems like we have like, a couple every single month, somewhere. We’re somewhere, like, come meet us, come talk to us. Maybe get a T-shirt if we print more. No promises on the T-shirt game though, I got to be careful from the T-shirt-
Reese Harper: Go to dentistadvisors.com/events.
Ryan Issac: Yeah, go check out our events, I mean, where are we going to be in the next few months? Right now we’re in the fall of 2019 almost, but we’re going to be in like, Dallas and I think Denver and-
Reese Harper: We’re in Plano, Texas. We’re at Thanksgiving Point.
Ryan Issac: New Orleans.
Reese Harper: We’re in New Orleans.
Ryan Issac: Philly.
Reese Harper: Snowbird, Philly, San Diego, Vegas, Scottsdale, Denver. Norfolk, Virginia. That’s where we’re at, lots of stuff coming up.
Ryan Issac: Yeah, come check it out. See if we’ll be near you. And then finally if you just want to chat with us about any of these subjects, maybe you’re like, trying to evaluate an entity structure or an investment, or you’re thinking about rebalancing versus paying your taxes. Just call us and let’s talk about it. Get on our calendar, you can do that at dentistadvisors.com. Just click the big green button that says Book Free Consultation. Or call us at 833-DDS-PLAN.
Ryan Issac: But as always, thanks again for listening, we’ll catch you next time.Taxes, Insurance