Episode 71: 10 Most Expensive Tax Mistakes with Craig CodySep 21, 2022
In this episode, David talks with Craig Cody from "Craig Cody and Company" a certified CPA and Tax Coach. David and Craig talk about how having a tax coaching could possibly be the best decision a business person makes. Craig and his clients review financial statements monthly and review all the ways to save money by NOT paying taxes. Basically, he is a master of the tax loophole, deductions, and how to avoid paying taxes. He knows his stuff and he shared his list of the "10 Most Expensive Tax Mistakes" most people make. This list contains items like audit paranoia, having the wrong business entity, missing medical benefits, home offices, and athletic facilities. He also talks about qualified business income and setting up the right retirement plans. The most important thing to avoid expensive tax mistakes is Failing to Plan. Tax Planning is a year-round activity not just something that is done on April 15th each year.
Craig gave away a free copy of his book in this episode to all the Discount Property Investor Listeners. You will receive a paper copy of the 10 most expensive tax mistakes that cost biz owners thousands! You can get it here: CraigCodyandCompany.com/DPIPodcast Craig has also co-Authored an Amazon Best Selling Book:: "Secrets of a Tax-Free Life" You can get that here: https://amzn.to/2NfI5SP
To reach Craig you can contact him by email: [email protected] or by phone: 516-869-4051 and his website is: CraigCodyAndCompany.com
]David: Alright guys, welcome back to the Discount Property Investor podcast. This is your host David Dodge, Mike Slane is out in the field today. However, I am joined by a certified tax coach and CPA Craig Cody. How we doing today, Craig?
Craig: I am doing great, thanks very much for having me today.
David: Absolutely, thanks for coming on the show and being part of this. We are super excited to have you on the show. Craig, give us a little bit of information about yourself. Tell us a little bit about your background. I see that you were a police officer. I am interested to hear a little bit about your past.
Craig: Oh sure, I am a CPA, also a certified tax coach. I own a business, and I am a former New York City police lieutenant. I was in the police department for 17 years. The last ten I have been a certified tax coach. Basically as a certified tax coach I belong to a select group of practitioners throughout the country. We do extensive training, continuous meet ups, mastermind groups. We focus on tax planning for business owners, real estate investors. Basically helping them keep more of what they make. So legally reduce their tax reliability.
David: Man, I know taxes are the biggest bill of my life. I always tell all my buddies and my friends, the biggest bill in your life is most likely your taxes. I am actually a tax nerd, I don't know enough about it to obviously coach anyone by any means like yourself. But I have read quite a few books on taxes. I have a CPA that I talk to routinely here in the St Louis area, try and get her to help me and coach me on how to save money on taxes; it's crazy how many pages there are, I think it's like 75,000 pages, something crazy like that, right?
Craig: It's huge.
David: It's crazy but-- I am under the impression that only a couple of those pages are telling you exactly when and where to pay. Whereas a majority of those pages are written by rich people to protect rich people. Basically avoid, prevent or delay in paying those taxes, is that right?
Craig: That's 100% correct.
David: Pretty crazy.
David: Well I am really interested to hear more about some of the things you're doing, tax planning, corrective strategies designed to minimize your taxes. So what is a pro active tax planning? And how can it minimize your taxes? How does that work?
Craig: So the typical CPA accountant out there is very good at putting the right numbers in the right boxes, but it stops there. How can we legally reduce your liability? What are you doing? Maybe we can do it a little bit differently, and we can save you some money. So that's what pro active is basically, taking the time and planning ahead. Whereas people go and expect to see their tax guy in February, March or April and think they can work miracles. There's not a whole lot of miracles that can be worked at that point. History has been written, so instead of looking in a rear view mirror, we are looking ahead and trying to figure out what you can do to lower your tax liability.
David: Man, I have heard that so many times in all the books I have read. Tax planning is an everyday task. It's not something you can necessarily do looking back, like you said.
David: Man, I have heard that so many times, I love that.
Craig: The book I am going to offer to your listeners for free is The 10 most expensive tax mistakes that cost business owners thousands. We will give you a link at the end of the show for that. But the number one mistake is failing to plan, not taking any action until it's too late. So if you start planning now, you can save a lot. If you wait till it's time to do your taxes, there is not a whole lot you can do except maybe a retirement plan.
David: Okay, that makes perfect sense. I love that, I might even name the episode failing to plan, number one mistake is failing to plan. I love that, man. That's great. So what would you say is the biggest mistake you see in small business owners making regarding taxes?
Craig: Picking the wrong entity to operate their business out of.
David: Picking the wrong entity, okay. Can we dive into that just for a couple of minutes? Give me some examples if you don't mind. I know there are lot's ways you can structure your business legally. And I know there is a lot of different elections you can take when it comes to the tax side of things. But I don't know much about that, so if you could fill me in that would be awesome.
Craig: Right so typically what happens if someone starts a business, depending on what they are doing is-- they will talk to their attorney, or an attorney, or worse yet they will go to Legal Zoom or something like that and just figure it out that way. But-- hopefully based on where they are they will pick the best way for liability purposes. But if they have they have the CPA in there, and they confer with the attorney and the three of them get together, and say what is the best way to do it legally? What's going to work out tax wise the best? And is there a way to get the best of both worlds?
Craig: That's what you want to do when you chose the right entity, because me and you can be in the same exact business. But because of what I have going on in my life, maybe a corporation is best, and maybe for you an LLC is the best. So we want to say, okay based on your particular circumstances, what's going to work out?
David: Right, I don't want to dive too deep into this by any means. But, what are the major differences between incorporating, having and LLC, so on and so forth?
Craig: And LLC is let's just say, taxes as a partnership, taxed as a sole proprietor, which means everything if you are in an active trade of business is subject to self employment tax.
Craig: Whereas an [00:06:55.25 - inaudible] corporation in an active trade of business, only your salary is subject to self employment tax. Depending on what you're doing, you might not want to be in an LLC. A reason you want to consult with professionals is because if you are a landlord, you might not want to hold your property inside of a corporation. God forbid you get run over by a train, and you bought property for $100,000 and it's worth $300,000; you want to get a step up in bases. So if your kids go to sell it the next day, take the money and go spend it, okay? They don't have to pay tax on it. So depending on what you're doing, you really have to know; do I have an active trade of business? Am I just a landlord? There is a difference in how you want to have that entity structured. Maybe you need to have two entities, maybe you are a landlord, okay? But maybe you also have some active trade of business going on too. Maybe you could get the best of both worlds by having two entities depending on what you have going on.
David: Right. So a lot of it is going to depend on what you're actually doing, how you're doing it. Does it matter how many people are involved in the business, and or if you have W2 employees versus [00:08:06.02 - inaudible] employees? Are those factors that come into play? Or not necessarily?
Craig: Not typically. Typically it has more to do with the owners.
David: Okay, which is good. I am glad I'm asking these questions, because this is stuff that I don't necessarily have a huge grasp on. So whenever I came across your name and wanted to interview you, I get all excited about this kind of stuff. I know it's kind of nerdy to most people. But I love listening and learning about taxes. Again, it's the biggest expense in one's life.
Craig: Listen, I get excited.
David: I do too, man. I get excited about it. Correct me if I'm wrong, but whenever people are sitting around, typically whenever I'm sitting around with my buddies and having beers or whatnot; we start talking about business and money. I always bring up taxes and nobody likes to talk about taxes but me. I always kind of joke around with my friends and ask them, I am not obviously asking how much they make, that's not my business. But what do you think your effective tax rate is when it is all said and done? I get numbers anywhere from 25-40%. That's fine, that's just based on your income. But if you look at your whole life, and you are talking about all the taxes that you pay. Obviously you get taxed when you earn, but then again you are going to get taxed when you spend with sales tax. You are going to get taxed when you own personal property taxes. Sometimes you can even get taxed when you die. I kind of joke around that all my buddies are wrong, and the effective tax rate is probably closer to 50% when it's all said and done, because you are paying taxes when you get the money, you are paying taxes when spend the money.
Craig: Then on top of your sales tax you have your real estate taxes, you have self employment taxes. So yeah tax rates are high.
David: Personal property taxes. Yep, it all adds up, man. It's super high.
Craig: If you effective rate is 37%, and you could come up with an extra $20,000 in deductions that are legitimate, you have just saved yourself a lot of money.
David: A bunch of money. Well Craig, tell me how can a business, how can business owners use their CPA to their advantage. A lot of these guys out here I don't think are doing that. They are not using their CPA to their advantage, they are probably just putting together their spreadsheets, and or getting quick books up to date as much as possible, then they send it over to the accountants, to the CPA's. They just hope that the bill's not huge.
Craig: Right, exactly. If they took the time to communicate with that person throughout the year. I like to with our clients we like to send them a monthly PNL and have a discussion, do it via Zoom, it doesn't cost people a lot of time.
Craig: Then you know what's going on. When you talk to people you see what's going on in their life, what they're looking to do. Looking to buy something, sell something, whatever it is, and you give them that actional advice about what they could do and save money. So take the time, communicate, make sure they are going to communicate with you. If they're not, find someone that will.
David: Okay, that's a great piece of advice. Basically-- it seems to me like you are offering a little bit of a coaching service in there, with your CPA services, with your accounting and book keeping services. Sounds to me like you are also offering some coaching in there. I love having coaches. I have a real estate coach, I have a personal trainer so I have a fitness coach. I talk with my CPA as much as possible, I would say once a month on average we get together. We are either reviewing statements or we are talking about the new laws that are getting passed in congress. Or just ways to help save and reduce that tax liability.
David: I love it, man. That's awesome. So how often would you say a business owner should communicate with his or her CPA? And why is that so important?
Craig: So once again, monthly is a good way to communicate. You don't have the be on the phone with the guy for an hour, or the lady for an hour. Just touch base. It also helps you know your numbers, know where your business is at. If you're doing it, and you're doing it correctly, you can see where you are comparatively to the year before.
David: Oh I love that. I love that.
Craig: Some businesses like to do it comparatively with the month before, depending on what their type of business is. Some businesses are cyclical, some businesses are not. But just have that conversation. Hopefully they have the expertise and they are going to share it with you. I always tell people, don't look at your accounting as an expense. Look at it as an income item. Because if you're doing it right, they are going to want to save you a lot more money than they are costing you.
David: I totally agree. I look at that every year. Sometimes my tax bill can be upper, $2,3,4000 with my CPA because she is doing personal taxes and she is doing business taxes, she is doing a lot of stuff for me. But at the end of the year, she is saving me three to five times what I'm paying her, sometimes more. I totally agree.
Craig: That’s a pretty good ROI.
David: Yeah, it's a huge ROI. I am going to take a quick break and talk about a book that you co-wrote real quick here, Craig. Secrets of a tax free life, a surprising write up strategies that most business owners miss. I was just looking at this on Amazon a couple of minutes ago, and I am actually going to pick this book up. It looks like a great book. Can you tell me a little bit about the book real quick, Craig?
Craig: Oh yeah sure. I co-authored that with I guess about nine other people about four years ago. We each wrote a chapter. I actually wrote a chapter on how to make your child's [00:13:51.12 - inaudible].
David: Woah, tell us a little bit about that, if you don't mind.
Craig: Basically it comes down to you can hire your kids, tax court says you can hire them at the age of seven. I like to tell clients, wait till they are eleven. Document what they're doing, then by paying them a salary and putting the money into a bank account, the way it would be if they were a real employee. Then you can use that money to pay for private school, sports activities. You are effectively getting a deduction for that money, because you are deducting it on your corporation. They are getting the money, they are not paying tax, alright? You are using the money to pay for their sports activity, private school. With the new tax code you could actually pay your kid up to $12,000 a year, and they are not going to have any federal tax liability. So that's another huge way to save money.
David: Wow, that's awesome, man. There are multiple benefits of doing that approach too. Like you said, you're getting to deduct that money, but then it's tax free on their end, then you can use it to spend on sports or college or school or whatever, that's awesome.
Craig: Might normally spend post tax money on.
David: Alright, cool. Well Craig we are just flying through this interview. I'm having fun here, learning a lot. What would you say the ten most expensive tax mistakes that cost business owners thousands are, or would be?
Craig: We talked about failing the plan, we talked about the wrong business entity. Another one is audit paranoia. Oh I can't do that I might get audited. Well, your chances of getting audited are slim. If you are doing things correctly and you are documenting; you should not worry about being audited, because if you get audited you have the backup there.
Craig: Another thing is, and this has to do with the new tax law is qualified business income. So under the new tax code, if-- most businesses will get another 20% deduction against they net income at the end of the year when it comes time to pay taxes. There is some limitations on certain professionals. So that is the guy with the K1 for 200 grand, if he did everything correctly, he is going to get an extra $40,000 deduction on his personal tax return. So that's a gift from the government. You want to make sure you are doing what you need to do so that happens.
David: Right, right.
Craig: Setting up the right type of retirement plan, having your entities set up so you have the right type of retirement plan, where you can put as much money away as you want.
David: There are so many different types of retirement plans I feel like out there.
Craig: Yes, but there is also so many different ways you can invest your money. There are self directed plans where we see a lot of people are using it and investing in whether it's real estate, homes and stuff like that. Getting a better rate of return with a lot less risk. Setting up that right return plan can be a wonderful thing. If you are husband wife, that could be like $37,000 plus a profit sharing. So $37-100,000 between the two of you. If you are making the money and you can afford to put it away.
David: Yeah, that's a lot of money, man. That adds up, especially after a few years or doing that.
Craig: It sure does. We have missing hiring your family, hiring your kids. Do we have home office? Are we documenting that home office? The thing people forget about a home office is that yeah, maybe that deduction is not that big because it is maybe 3-5% of the total space in your house. But it opens up travel from your home office to your other office. It also opens up one of my favorites; the home athletic facility. So that could be your home gym of your pool, which becomes deductible.
David: Man that's awesome, home-- I've never heard of that one before.
Craig: That's a good one.
David: Wow, that's an awesome one, okay. What else have we got here? So back up for one second. Hiring your kids, can you also hire other family members? Or does that basically only work with your children? I don't have any children, I don't think I ever will have any children. How could I maybe use that advantage, or that strategy to my advantage?
Craig: Well probably other than hiring your spouse, it doesn’t really help you so much. But we have clients where they are supporting parents. You wouldn't put them on salary or anything like that, but there are other things you can do to make what you're paying them tax deductible if you take the time and do some planning.
David: Right, okay interesting, good to know. Home office, home athletic facility, then what's the next one then?
Craig: How about missing medical benefits?
Craig: If you have certain types of entities can set up a medical expense reimbursement plan. Maybe you hire your spouse and what they are doing-- you're not paying them a wage, but they are getting this medical expense reimbursement plan, they can use that to pay out of pocket medical costs, deduct the cost of your kid's braces. Cosmetic surgery, dental surgery, stuff like that. So we have a lot of clients where maybe they are a little bit older and they need some serious dental work. It's going to cost them like $25,000 and we just turn that $25,000 into deductible expense.
David: Wow, I would never have even guessed that could be possible, but that's awesome, I love that. Okay cool.
Craig: Then we have your typical car and truck expenses. So as long as you are using your vehicle for business, tracking your miles and taking the deductions. Then we have meals and entertainment. Entertaining isn't really as deductible anymore. But meals are deductible. So if you are taking people out and talking business, you should be writing them off.
David: Okay, I do do that. I write off all of my meals slash entertainment, as long as I am talking business as a real estate investor. I am not an agent, but I am an investor. I am always talking about real estate, I am always talking about the next deal, if someone could potentially became bird dog for me, and help me find that next deal I would be happy to give the a couple of hundred bucks, as like a finders fee or as a bonus. So yeah I definitely do that quite a lot. When it comes to the car and truck expenses, I use an app called Mile IQ, I am sure you would probably recommend that, or several other apps that are just like it. It's basically what we're always on. It tracks if-- basically tracks if I'm in a moving vehicle. Then at the end of the day or the end of the week I can go back and then say, hey this was for business, or this was for personal use. Quite honestly, because I am always out in the field driving around, anytime I see a for sale by owner sign I stop as a real estate investor and call that sign. Anytime I see a house that's got tall weeds, again I might not even be out looking for property, but I will pull over and leave a door hanger on that door. So basically I would say 90% of the time I am in my car, it's kind of considered to be a business expense, because I am out looking for properties. So unless I am taking the wife to dinner, going to the gym, or running to the dry cleaners; most of my drives are considered business expenses. So having an app like that helps to record all that stuff, because you are not then having to track the day, the time, the starting millage, the ending millage. It just helps pull all that together in a nice little spread sheet for you. Would you agree with that?
Craig: Oh definitely. We have a lot of clients that are using that.
David: That's awesome. So I just want to run through the list again. I counted eight, but I didn't go as fast as you. So I started with audit paranoia, qualified business income number two, setting up the right type of retirement plan number three, missing hiring your kids or I've added slash spouse because I don't have any kids. Home office or home athletic facility; that's probably my favorite one right there. Missing medical benefits slash medical expense reimbursement plans. Obviously car and truck that’s number seven. Number eight I just had meals and entertainment. So what am I missing on here, Craig?
Craig: Okay my ten mistakes actually turn into eleven, I am not good with numbers.
David: That's alright, give me twelve, the more the better.
Craig: The first one we talked about was failing to plan.
David: That's true, failing to plan.
Craig: And the wrong business entity. Then the last mistake is missing my help.
David: There you go, there it is. That's right.
Craig: That's where the real savings comes in.
David: Right, that's so true. Okay awesome. Well Craig this has been an awesome episode. I like when we do little bit of shorter episodes like this, people can get through them quickly. Craig, how can people reach out to you if they have more questions, and or are intrigued by your accomplishments, CPA, certified tax coach, co-author of an Amazon best seller? Let's say they want hire you to get help with their taxes, or maybe just hire you to coach them a little bit. How can they reach out to you? What's the best way for you?
Craig: So, our office phone is 516-869-4051, e-mail is [email protected] We are giving your listeners that wanted a free copy of our book, so if they go to our website, it's Craigcodyandcompany.com/DPIpodcast for Discount Property Investor podcast. They can fill in an opt in and we will mail them an actual copy of the book.
David: That's sweet, man. I just want to re-iterate that real quick so we can make sure we get that domain right. You said Craig Cody, that's C.R.A.I.G, C.O.D.Y, and company, A.N.D, C.O.M.P.A.N.Y, dot come, then you said forward slash--
David: For Discount Property Investor.
David: Podcast, okay cool that's the link, we will put that in our show notes as well for all of our listeners, and all of our YouTube viewers. Then what will they get when they go there and fill all that out?
Craig: We will actually mail them a paper copy of The ten most expensive mistakes that cost business owners thousands.
David: Ten most--
Craig: Expensive mistakes that cost business owners thousands. It's packed full of all good stuff that we talked about.
David: Awesome, okay got it in the show notes here, that sounds great. I can't wait to go fill that information in and get my copy. Then I am also going to purchase The secrets of a tax free life. That looks like an awesome book, Craig.
Craig: That's a great book.
David: Yeah, it sounds like an awesome one. Well Craig I have also got some other ways for people to contact you, Facebook, Twitter and whatnot, I will throw that all in the show notes for you. I do appreciate your time today, and I have had fun learning a bit more about some tax strategies that I was unaware of. I always feel like I learn something new on these podcasts, I love doing them. But Craig, thanks again for joining us. If there is anything else you want to add, we are happy to talk about now.
Craig: No, just to remember to communicate with your CPA and be pro-active, stop looking in the rear view mirror.
David: Stop looking in the rear view mirror, look ahead. That's such a great tip.
Craig: Keep more of what you make.
David: Keep more of what you make. That's really the goal here. Anywhere from 35-50% of your money goes out the door to taxes, and that's just kind of the average. I feel like also too, Craig, the harder you work for money, the more taxes you pay. It's kind of unfair and I said it earlier, these laws are written by rich people to protect rich people.
Craig: That's right.
David: The people that are making money, the majority of their money by trading sweat, blood and tears for that money, like they are actually doing physical labor; I feel like those are the ones that are getting taxed at the highest rates. Those that are making their money from dividends, from stocks or passively from real estate or even lending, or something along those lines; they are getting taxed at a lower rate. That's just the way it is, that's the law. There's no way again, so it kind of re-iterates that, taxes are written by rich people to protect rich people. So you want to try and get your income coming from those particular areas so you can save more of it, keep more of it. Wouldn't you agree with that, Craig?
Craig: Most definitely.
David: That's crazy. It's really crazy. Well Craig I appreciate your time today, thanks for coming on our show. All our listeners are going to love hearing about this. Hopefully this will also check out, The secrets of a tax free life, the book you co-authored. Again, go to CraigCodyandCompany.com/DPIpodcast. They are going to receive a paper copy with The ten most expensive tax mistakes that cost business owners thousands. Craig, thanks for doing that, man. We really appreciate whenever we have-- we have guests on the show that offer something to the listeners.
Craig: Thanks very much for having me I appreciate it.
David: Well, Craig have a great day, and we will talk soon. All the listeners out there, stay tuned for the next episode. Thanks again guys, have a great day.
Craig: Take care, bye-bye.