July 7, 2018

JF1404: How To Get The Most Out Of Your CPA With Proactive Tax Strategy and Planning with Brandon Hall

Brandon has clients in every state, and only works with real estate investors. To say he’s experienced saving his clients money on their taxes, would be an understatement. Today we hear about why tax planning is important, and why your CPA should be doing more than just filing your tax returns. If you enjoyed today’s episode remember to subscribe in iTunes and leave us a review!


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Joe Fairless: Best Ever listeners, how are you doing? Welcome to the best real estate investing advice ever show. I’m Joe Fairless, and this is the world’s longest-running daily real estate investing podcast. We only talk about the best advice ever, we don’t get into any of that fluffy stuff.

First off, I hope you’re having a best ever weekend. Because today is Saturday, we’ve got a special segment for you, like we usually do, called Situation Saturday. Our guest is gonna talk about a situation that you might find yourself in, and how to overcome it. We’re gonna be talking about the sexy topic of taxes today… Yum! Good stuff.

Brandon Hall is with us, and he’s gonna make it entertaining. I’ve met him multiple times; you might recognize his name, and if you do, that’s because you’re a loyal Best Ever listener. Episode 484 – that’s like 1,000 days ago pretty much… Episode 484, the title was “What your tax strategy lacks in the multifamily space.” I interviewed Brandon about 1,000 days ago, and we’re gonna be talking about today how to get the most value out of your CPA with proactive tax strategy and planning, not just the tax returns. How are you doing, Brandon?

Brandon Hall: Good, thanks for having me on, Joe.

Joe Fairless: My pleasure, and nice to have you back. A little bit more about Brandon – he is obviously a CPA and he’s the owner of The Real Estate CPA. He’s an active real estate investor, and he’s principal at Naked Capital. His Big 4 accounting firm and  personal investing experiences allow him to provide unique advice to each of his clients, and his website is TheRealEstateCPA.com. With that being said, will you give the Best Ever Listeners a refresher? It’s been 1,000 days since we last talked on the show, so you can give them a refresher on your background, and then let’s dive right in.

Brandon Hall: You did a pretty good job. I run a virtual CPA firm. We have 12 employees currently that are spread out throughout the United States, no central office location. We have a client in every state, but we only work with real estate investors or business owners in the real estate space.

It’s a lot of fun, especially just the virtual connections that we make. I’m on the East Coast, and we’ve got a lot of clients in the California area, and those conversations go just as well as the local clients. It’s been a lot of fun.

Then I’m in a syndication group called Naked Capital, and we basically just place funds in different deals throughout the United States. We’ve placed deals in two separate multifamily syndicates over the past (I think) six months now.

Joe Fairless: Sweet. That could be a whole other conversation. Today we’ll focus on getting the most out of our CPA from a proactive tax strategy and planning standpoint, not just a tax returns… So how should we approach our conversation?

Brandon Hall: I think that it’s just important to understand that there’s a difference between tax preparation and tax strategy, and that you need to go to your CPA and request the service that you actually want.

A lot of CPA’s aren’t very proactive and they don’t really necessarily understand the difference between tax strategy or tax preparation anyway, so I think that we can just kind of talk about how do you make that approach, what is it gonna look like cost-wise, what is it gonna look like service level-wise, and what are the different options out there for you. We can also talk about when do you need to make that approach, what the 2018 tax change is… There’s a  lot going on, so when do you call your CPA up and have that conversation with them to see what you need to be doing from a strategy perspective, and what do you need to have there available for that conversation.

Joe Fairless: Let’s start with answering a question along those lines, but instead of the what and the when, how about why – why do we need the proactive tax strategy and planning, versus just the tax returns?

Brandon Hall: Yes. The tax return is a compliance service. Very boring, very straightforward… We’re filling out forms, we’re submitting them to the IRS. So still a very valuable service, because you’re getting accurate data into the tax return that’s then being submitted to the state governments, but it’s all after the fact. So once December 31st rolls around, your facts for the prior year are pretty much set in stone… So tax preparation is just looking at those facts and then reporting the outcomes. Tax strategy is saying “Let’s change the facts, which will then change the outcome.”

Joe Fairless: Okay. Do you have maybe a specific example, if you receive the tax returns and that service – what that would do, versus the benefits, getting more into the reason why of being more proactive?

Brandon Hall: Sure. So the tax returns… If you’ve just received the tax returns – again, valuable service, because it’s accurate. Banks like to see CPAs signed off on the tax returns, rather than you preparing it yourself, so there’s value there… But it’s just a report card of the prior year. It’s not gonna be anything where we can say “Oh, well if you can structure it as this entity and do these things…”, because again, December 31st has already rolled around, so your facts are set in stone.

There are some things that we can do – we can look at the tax return and say “Let’s make a contribution to a solo 401k or a self-directed IRA”, but other than that, your facts are pretty much set in stone. What we would do is we would use those tax returns as a benchmark for the tax strategy, the consulting part that we know is the most valuable to real estate investors, and to any business owner out there.

A good example, for instance, with the 2018 tax laws we have this new 20% pass-through deduction, but you only qualify for the 20% pass-through deduction if your taxable income is below certain thresholds. So from a tax strategy perspective, we’re looking at our clients this year and we’re saying “How do we keep our taxable income below these thresholds, so that we can get this 20% pass-through deduction.” It might mean buying a new vehicle, it might mean investing in a land conservation easement, or maxing out a 401k. There’s so many different things that you can do, but you have to do a lot of these things before the end of the year, and a lot of people don’t do anything before the end of the year; they only think about contacting their advisors or working with a CPA in January, February, March of the following year, but by that time, a lot of the strategies that we can implement – it’s too late.

So this year especially, I’ve been telling everybody – if there’s one year that you need to have your records really in line and just up to date as possible, and be having multiple conversations with the CPA to make sure that you’re on track, it’s this year, because that 20% pass-through deduction is gonna be key for every real estate investor, every business owner to benefit from.

Joe Fairless: If we have a CPA right now and for whatever reason we don’t choose to work with you, so we’ll move that variable aside just for the purpose of this question, what do we ask him/her in order to be proactive and help set ourselves up for success?

Brandon Hall: So it depends on what activities you’re involved in, obviously. If you are anybody but a syndicate – so I’m not a general partner in a syndication, closing on these big multifamily homes – then I’m gonna be asking my CPA, “Hey, here are my facts, here’s my income to date (not “Here’s what I think my income has been to date, but here’s actually what my income is, because I keep awesome records”), what should I do to ensure that I maximize that pass-through deduction that is now available to real estate investors and business owners?

That question should lead to a very nice, long, insightful conversation about different strategies that you can utilize to drive your taxable income down, so that you can take full advantage of that pass-through deduction. If you’re a syndicate – now we’re taking the other stance… If you are a syndicate, you’re a 30% in a big multifamily property, or you’re just a GP, or you take a stake in the GP, you need to be asking your CPA or the CPA that’s running the deal “What do we need to be looking out for in order to maximize our investors’ return?” There’s a lot of changes with business interest. Business interest is now limited in what you can deduct, and this syndicate needs to know “Do we make an election to elect out of that, or do we not? What are the facts and circumstances here? Which way do we need to go in order to maximize our investor returns?”

Generally, a syndicate could just kind of buy the multifamily property, you could do a cost segregation study and call it a day, and you’re maximizing investor returns and everybody’s happy… But now it’s gonna be much more strategic because of these business interest limitations that come into play.

Those are conversations that everybody needs to be having with their CPA, from both levels. Basically, just “How do I get my income below whatever threshold?” and then if I’m the syndicate, the bigger level players, “What do I need to be doing with the business interest limitations in order to maximize my investor returns?”

Joe Fairless: How do you know what you should do after you receive advice from a CPA? Because my challenge is sometimes when I ask a CPA a question, I get exactly the answer to the question, which is exactly what they should be doing, but I’m looking for also more of an advice on which direction I should take, because a lot of times it’s very clinical in how they approach their answers.

So once we get that information, how do we know which direction is the best to take?

Brandon Hall: Yeah, you’re gonna find that with attorneys, too. CPAs and attorneys, very clinical – you ask, I answer, that’s it; let’s move on. So I think that that’s where the strategy portion really separates itself from the preparation portion. A lot of our clients are pretty used to just asking their CPAs at tax time or after tax time, “Hey, looking at my prior tax returns, what could I have done differently?” or “I’ve got this particular purchase going on right now… Anything that you see?” and it depends on what type of CPAs you work with. Most CPAs bill hourly. They want to answer your question in 15 minutes, call it a day, move on to the next question, answer that in 15 minutes, and they’ve got 500 clients that they’re working with. We don’t do that. We bill out tax plans, and it’s gonna cost $15,000, but we’re gonna look at every aspect. We’re gonna give you a plan and action items and we’re gonna help you implement it.

So one, it does depend on who you’re working with and how they structure their business, but two, it also depends on the questions that you ask. So if  you ask very black and white, yes/no questions, then you’re gonna get a very black and white, yes/no answer. But if you’re asking more open-ended questions, then you’re going to encourage the CPA to explore those questions.

A lot of our new clients will just say “Hey, I don’t know what to ask. I just need to know how to minimize taxes.” Well, as a CPA, I look at that and I say “Okay, we could explore literally every single aspect, but it’s gonna cost a lot of money to do that, so let’s try to narrow it down into the specific aspects that you want to explore.” Yeah, I agree, a lot of CPAs just want to answer the question…

Joe Fairless: In that example, how do you narrow it down? What questions do you ask that individual?

Brandon Hall: Okay, so let’s say that you run a syndicate, you’ve raised multiple millions of dollars and you’re trying to figure out how to maximize investor returns. You first need to understand what variables are out there that you have control of in order to maximize investor returns. So you’re not gonna care about 401k’s, you’re not gonna care about SD IRAs, you’re not gonna care about asset purchases, but you are gonna care about what are the new 2018 tax laws that might affect me. You could just start there. What are the 2018 tax laws that might affect my syndicate? CPAs should be saying something along the lines of “Well, we’ve got the pass-through deduction that we can pass to investors. We also have that business interest limitation that we might need to avoid or work around.”

Then the question should be “Can you explain what that business interest limitation is?” The CPA explains what that is. Then you say “Okay, what are my options along those lines? Which routes can we potentially take, and can we potentially model this out in Excel to see what the impact might be over the next 5-7 years on a net present value basis?”

When you’re asking more sophisticated and intelligent questions — and you might not even know what you’re asking about, but just understanding that at the end of the day you want a scenario, you wanna see side-by-side scenarios, so that you can make a decision… So you have to ask questions that will generate that type of a result.

Our clients that get the best results from us are generally the ones that are saying “Hey, can you build me out a scenario? I need 3-4 scenarios or however many scenarios possible, side by side, so that I can see what the impacts are gonna be if we go this way or that way.” Those are the folks that have the most clarity in their tax strategy.

Joe Fairless: The most challenging client is – fill in the blank.

Brandon Hall: The most challenging client is the one that just says “Give me tax strategies.” [laughs] That’s the type of client that we could literally go from any end of the spectrum; we try to do a pretty good job of asking a lot of questions, so we can narrow it down. We’re not gonna go propose “Oh, well your kids could work in your business” if you don’t have any kids, right? So we try to do a good job there… But knowing kind of what you want out of the CPA relationship helps everybody involved.

Joe Fairless: What are some open-ended questions that an investor can ask a CPA, that would help solidify the direction that they should take the conversation?

Brandon Hall: You can ask open-ended questions on anything, but it’s just kind of, I don’t know, giving some facts and circumstances to help guide that open-ended question. Coming to me and saying “Hey, you saw my tax returns, you saw my goals… What should I do to minimize taxes?” does not help me a lot. But coming to me and saying “You saw my tax returns, you saw my goals, and next month I’m purchasing a 4-unit multifamily home. What can I do within that 4-unit multifamily home, or surrounding that 4-unit multifamily home, to reduce my tax liability, either overall, or just related to the income that that multifamily home spits off?” That’s when we can actually say “Okay, let’s really dig into this, let’s spend some time digging into this”, and producing good results, good strategies that you can utilize. That helps out a lot.

Joe Fairless: Anything else we should talk about as it relates to preparing us to be proactive with our CPAs on planning, that we haven’t discussed?

Brandon Hall: Yeah. I’ve talked a little bit about how the bad clients are the ones that say “Just give me some tax strategy”, and it’s totally okay to not know the questions to ask. I would highly encourage you to read online about your situation. Try to understand where you fall in the tax position world.

You wouldn’t go to a business coach and just say “Help me on everything. I have no idea what I’m doing.” You would go to a business coach and say “Hey, I’ve got these specific problems that I need help solving”, and that’s the way you need to approach your CPA relationship, too. But even if you have no clue, just having up to date information will help us tremendously in solving your problem.

So again, don’t come to me in October and not have your 2018 financials through October ready to rock and roll… Otherwise I can’t help you very much, because there’s no data there to really guide me to recommend any sort of strategies. So that can really help with the proactivity if you just bring accurate and updated data to your CPA to facilitate those strategy sessions.

The other thing is that I would just check in with your CPA every once in a while. You don’t necessarily need to have a phone call, but just send an e-mail update. Don’t wait till the end of the year to update your CPA on everything that happened. We have clients that will update us on a monthly basis with their monthly transactions; even if there were no transactions, they will just say “Hey, no update.”

The cool thing is that we can put all that into their client file, and now all of a sudden strategy becomes a lot easier, because we’ve got up to date information, and the tax preparation also becomes a lot easier because we don’t have to go back and have you rehash everything, because we’ve already got it.

Joe Fairless: I imagine you all do bookkeeping, because the regular updates back and forth would be a headache for some people.

Brandon Hall: Oh yes, we do a lot of bookkeeping, CFO outsource work – absolutely.

Joe Fairless: I can tell you that’s been a life-saver for me, having the group I work with do bookkeeping and then also taking care of the tax stuff, because before that it was just a hot mess with a lot of different things, but then once we got that in place, it added years to my life, that’s for sure.

Brandon Hall: Oh yeah. Our goal with our bookkeeping and accounting services is to remove the business owner as much as possible, and the business owners tend to be a lot happier people once they’re out of the accounting and the bookkeeping. It’s one of those things where you do have to scale to a point where you can afford a CPA firm to offer full services. We’re not nearly as cheap as you going to Upwork and finding somebody, an overseas bookkeeper to run your books for you… But having it all in one place allows us to look at the books and say “Hey, Joe, you’ve got this issue that you didn’t realize, but since we’re doing the books for you and we’re doing the tax strategy and we’re doing the tax prep and we’re watching your account pretty closely, we found this. Let’s have a conversation about it and figure out how to mitigate it.”

So that’s the benefit that you get when you do it all in one place… But even if you don’t, I highly recommend that you do [unintelligible [00:18:38].23] I outsource my books, and I’m an accountant; I don’t do my own books, so… [laughs] Get rid of them.

Joe Fairless: Absolutely. Well, Brandon, how can the Best Ever listeners learn more about what you’re doing and get in touch with you and your company?

Brandon Hall: You can connect with me on LinkedIn. You can just search Brandon Hall CPA, and I should be that first result there. You can connect with me on Bigger Pockets… I am relatively active these days. Or you can go to TheRealEstateCPA.com and sign up for our newsletter, become a client, or whatever you’d like.

Joe Fairless: Brandon, thanks again for being on the show, giving us some very practical tips for how to approach the conversation with our CPAs. It really is quality in, quality out, trash in, trash out… So the advice is going to be as good as the inputs that we bring to the conversation; as you said, bring accurate data points and provide regular updates… But then also be intentional about what we want to solve for.

I love your analogy of a business coach. I certainly would not hire a business coach if I didn’t know what the outcome for that engagement would be, and same with this… So for my own selfish purposes, thanks for coming up with that analogy, because that really resonated with me… And learning more by having this conversation and listening to this conversation will help us be prepared for our CPA conversations, and then ultimately, it’s a money-saver. This conversation likely saved a lot of money for the Best Ever listeners, because now the conversation will be of higher quality when we speak to our CPAs, and that will be less time, which equals more money saved.

Thanks for being on the show. I hope you have a best ever day, and we’ll talk to you soon.

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