The IRS Loopholes That Could Save You Thousands This Year with Karlton Dennis

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“You as a taxpayer have to be willing to apply code section 162A. That's how you can write”

things off every single day when you walk out your house. Nobody wants to think about taxes, but everybody wants a tax hack. So today and sitting down with tax strategist Carlton Dennis to make sure we don't spend one more penny than we have to on taxes. He tells me what tax perks you can still take advantage of before the filing deadline. If you have a child, IRS will provide you $2,200 per child and $1,700 of that is refundable. So a lot of taxpayers

end up getting money back just by claiming their children had a stop leaving money on the table. The vehicle right off code section 179. Why is that one so popular? It's popular because people know that they can go via vehicle that weighs over 6,000 pounds in year one. On a $100,000 vehicle, you may put $5,7500 down, but if you're writing off a 100k in your in the top tax bracket, which is 37%, that's a $37,000 right off.

Mine is your 5k down payment. You're walking away with $32,000 in savings in the moment you made that investment. And the legal loopholes that can save you now. Let's talk about one of my new favorite tax moves. Children on payroll. Yeah. Children on payroll. I'm Nicole Lathen. The only financial expert you don't need a dictionary to understand. It's time for some money rearing. Carlton Dennis, welcome to Money Rehab. Thank you so much from excited to be on here.

So excited to have you so excited to talk tax time, which I don't know if a lot of people say,

copy out this. Not so much tax time, but tax hacks. Yeah. Everybody wants to save money. Everyone wants

“new tax hacks. We're going to break down some tax hacks. Yeah. You're the tax hacks. Man, say that”

10 times fast. We have a little over a week before the tax filing deadline. Yes. Let's break it down between individuals and entrepreneurs and what someone can do to maximize their filing. Yeah. I mean, if you're going to rate it a follow your tax returns, hopefully you did your tax planning last year. But if you're at that point, you're trying to figure out if there's anything left I can do, it really comes down the type of income that you're earning and for most business

owners, they're going to look at their deductions to see, there anything that I left off or anything I can maximize. And inside of the tax code, you have one little tool left, even though you're past December 31st, and that's bonus depreciation, which allows for a business owner to take an expense all in one year, such as a vehicle that possibly weighs over 6,000 pounds or even camera equipment laptop or a fork lip. Sometimes these taxpayers will have their CPAs depreciate

these items over 5, 7 years, which is nice. You're incrementally getting the right off. But if you're

“trying to maximize your tax bill and you don't write a huge check, I recommend applying that”

bonus depreciation if yourself employed. And hey, if you're W2, I don't forget about you as well. Most W2 taxpayers are very familiar that they're limited on their deductions. But that doesn't mean that you can't take advantage of the child tax credit. For example, if you have a child, IRS will provide you $2,200 per child and $1,700 of that is refundable. So, a lot of taxpayers end up getting money back just by claiming their children. Okay, the bonus depreciation stuff was

really big in the big beautiful bill. How many times have you read that thing? One big beautiful bill. One big beautiful bill. One big beautiful, I say that one ten times fast. I've read the bill probably like seven or eight times now to be honest with you. It was pretty easy to just extract the changes and then everything else was more or less fluff. But I love that we got 100% bonus depreciation back because I work with so many entrepreneurs. Yeah, I mean, I wanted to get into all of the ones

that you mentioned like the section 179, which is known as the Range Rover tax deduction. I also wanted to make sure that somebody is not just buying a fork lift, like for funds used for tax

deduction, right? How do you think about those big purchases? Yeah, I mean, I always look at leverage

because when you're a business owner, one of the beautiful parts about being a business owner is you could choose to pay for things cash or you could choose to take out leverage and leverage other people's money and with equipment or with vehicles, you can choose to put a small down payment down, but you might be able to write off the entire piece of that purchase. So we mentioned the vehicle right off code section 179. Why is that one so popular? It's popular because people know that

they can go buy a vehicle that weighs over 6,000 pounds, put a very small down payment down, but then be able to write off somewhere around 100% of that vehicle's purchase price in year one. On a hundred thousand dollar vehicle, you may put five thousand seventy five hundred dollars down but if you're writing off a hundred k in your in the top tax bracket, which is 37%, that's a 37,000 dollar ride off minus your five k down payment. You're walking away with thirty two thousand

dollars and savings in the moment you made that investment. And so time value of money for many entrepreneurs tells them, well, if I keep more of my money right now, maybe I can reinvest it to make more money even though I have that car payment. So that's one of the ways in which the

government has benefited taxpayers who are entrepreneurs to go and buy vehicles. But this is always

been a thing. It's just gotten juicier since the big beautiful bill. Yeah, it was going to be 40% this year, meaning that one hundred thousand was going to drop to a forty thousand dollar ride off. A lot less sexy. It just got pushed back up to a hundred percent bonus depreciation. And that doesn't just exist for business owners who buy cars over, you know, six thousand pounds. It's also for real estate investors as well, who are leveraging real estate depreciation.

“And on the car, you have to use this for work. Yes, business. Right. And you're such a pro”

because you were like, you might be able to do this. There are always astrics. Yes. What should you keep in mind? The astric is this vehicle needs to be used one hundred percent for business. If you're going to take one hundred percent bonus depreciation on the vehicle. If it's not used 100 percent for business, then you have to determine how am I going to be able to write this off? Because the

IRS says that the vehicle has to be used more than 50 percent for business to be a tax write off.

That means you're going to have to start tracking your time. And for many taxpayers, they don't do a good job of tracking their time. So what I would like them to do is I would like them to look at their week and determine which weeks are personal that I'm going to be in my vehicle and which which days of the week is going to be business. For most taxpayers Monday through Friday is going to be business and Saturday in Sunday is going to be personal. When we add that up over the

year, most taxpayers that are self-employed are spending somewhere around 80 percent of the time in their business vehicle, 20 percent of the time personal. So being able to leverage that 100 percent bonus depreciation doesn't happen for every single business owner. Because not every single business owner is driving their G wagon seven days out of the week. Yeah, but I mean, I have this conversation with my accountant all the time. I'm like, you're entrepreneur. I'm like everything. I don't

step out of the house unless it's business. Everything I'm doing is business. Absolutely. And I would

states that a business owner can take a business deduction if the deduction is ordinary, necessary,

unreasonable to the business owner in the pursuit of income. And many taxpayers get so confused by this. They want a list of all the things that they can write off for their business. I'm a real estate agent. Give me the real estate agent write-offs. I'm e-commerce. Give me the e-commerce write-offs. But the IRS website doesn't have a list of write-offs based off of your profession. And they don't know. But they give you code section 162A. And you as a taxpayer have to be willing

to apply code section 162A to your situation to determine, well, what expenses are ordinary for me in my business, necessary for me in my business, and reasonable for me in my business in the pursuit of

“income. That's how you can write things off every single day when you walk out your house.”

Oh, I have used this argument so many times when I count it around close specifically. They're like, no, it has to be the code of armor or something like that. I don't know if they just made this up. But they're like, no, absolutely not unless you need it as a protection against weapon or something. I'm like, no, this is absolutely part of my business. Absolutely, it is. And one of the reasons why I let my taxpayers write off their clothing is if

they are able to prove that it's a part of their uniform. So as a taxpayer, I like to wear typically suits or typically blue. That's my color. And I'll mainly get most of my equipment that I'm wearing my clothing because this is my equipment when I show up to work. I get it embroidered with my name and my company's name. And then inside of my operating agreement, I state that we have a budget every single year inside of my operating agreement for clothing associated with my brand.

And so I typically spend anywhere from 15 to 20 thousand dollars a year just on suits and clothing to swap out because I'm on camera and video and that attracts revenue for my business. So just get it embroidered with a little logo and you're sad. And make sure that you're wearing it. It has to be a part of your outfit or your costume. That's correct. Okay. It's called the accountability. Absolutely. And you get all of those clothes that you know

you're wearing for business embroidery. Okay. Well, let's talk to the entrepreneurs who are still dabbling in their entrepreneurial endeavor. Let's say they're making like 5k on a side hustle and they're not sure whether or not to set up an entity yet. What would you say from a tax perspective is a good time to do that? I would say at $5,000, you're still figuring out whether or not it's a business. So yeah, I wouldn't really focus on setting up an LLC, but I would be thinking about it.

“For many taxpayers who are starting side hustles, you have to be very, very careful”

of reporting side hustle expenses over multiple years. A lot of taxpayers may only make a little bit of money like $5,000, but then their tax returns show that they're having a $40,000 or loss. Why is that? Well, that's because they're taking all of these other expenses that they wanted to ride off as business expenses against other forms of income, such as W2 income they may have with their employer or $199 income that they may have

being a contractor. And that's fine in the first year. And maybe it's even okay by the second year.

But by the time you get to the third year and you're still reporting the loss and you don't have a lot of side hustle income to show for, the IRS might actually claim your business as a hobby business. And that's bad because they'll disallow your expenses that year. Then they'll go back to the previous year and disallow the expenses in the previous year and they can go back up to three years to be able to do this. We've seen taxpayers who have claimed expenses and losses

on their return, shown a very small economic gain from year to year, IRS sends them a notice, questions their expenses, rules the business of hobby, the whole thing blows up in the taxpayer's face, their refiling tax returns, plus penalties, plus interest fees, the whole thing becomes a mess. And you push it. Like, let's be, let's be honest. You try to get as much as you possibly can

“for your clients, which makes all the sense in the world. That's what the tax codes are there for”

to be used. But you have to be aware of what the red flags are as well. So if somebody is doing their side hustle and it's more of a hobby than a job, but they're like, heard the podcast, I want to get a range rover. I want to deduct it. One year comes around two years, comes around three years, comes around, you say that's too long. What else is a red flag? Well, big red flag is using categories on the tax return that the IRS has intentionally set up

for people who are a little bit uneducated about how the tax system works. And the two primary

categories that I always recommend entrepreneurs to avoid is other expenses and miscellaneous expenses.

These two categories show up primarily on schedule fees, which is for sole proprietorships or single member LLCs. When many business owners are filing their own return or working with an experienced tax professionals, they don't know how to categorize all their expenses. Is this marketing? Is this advertising? I don't know. Is it a tool? Is it equipment? Well, not it's just stuff it into other expenses. I can just don't know what it is.

Well, I just put it as a miscellaneous expense. And when taxpayers have inflated categories on their tax returns, like miscellaneous expense or other expense, these can sometimes be red flags, and can subject to you to an IRS audit. Not only do you have to also list out what each other

to share so much. So I recommend taxpayers always work with a licensed CPA or tax professional

“when you're filing the returns and try to avoid those two categories of their expenses and”

miscellaneous expenses because the IRS likes to go after those. How many times have you been through not it? I've probably sat in through 17 to 20 audits. My clients don't get audited at that much. Last audit I dealt with was in 2021. Is this scary? No, not at all. Most audits are not that scary. As a matter of fact, what do I do? Well, you're sitting across from somebody in a field audit. They have all the documentation in front of them. You have all your substantiation in front of you. Why

you're claiming X is happening? And most of the time, if you do not have correct documentation, these audits don't go in your favor. So you're seriously up against the gun trying to prove things that you didn't have real documentation for. When you have a lot of documentation substantiation, an audit can actually happen pretty fast because they're just verifying things. It's like a teacher grading a test in front of you. Okay, this checks out, this checks out, this checks out,

“this checks out, this checks out. And to believe it or not, 60% of all audits that we've dealt with”

have ended in the taxpayer actually getting money back. I actually found out that the IRS agent made mistakes or that there was a mistake that we caught from a previous tax accountant when we were in the audit that we were able to address with the IRS auditor. Those are the funnest situations that end up happening when the government said, "Oh, we want money from you. Hold on a second. No, no, no, no, you actually owe us a couple of more dollars." That's absolute best case. Yes,

best case scenario, of course. What would you say to people who are terrified asking for a friend about audits? Yeah, I mean, listen, I don't live in fear of the IRS because I view the IRS like dentists. They are there to report things that you are already aware of. When you have a cavity, you already know you have a cavity and you probably did things that led to you having a cavity. You skipped, you skipped dental appointments, you're not brushing your teeth, you're not

flossing, that's no different than a business owner, not documenting their expenses, co-mingling their expenses and not keeping receipts. It's very simple to be able to take

“advantage of the tax code, but you have to be willing to do the boring things right.”

And most business owners are moving so fast, they're making so much money, so they get terrified of the IRS because they've heard stories that the IRS can come knocking on their door or that

they can place a lead on their home and that the uncle Sam person is just an uncle that you never

actually want in your family, so they live in fear of this person. But if you are educated on how the tax code works and you understand that it's an incentive program and in order to get all these benefits, you have to be willing to abide by specific tasks and rules, then you're going to be excited to go do those tasks and rules. You're going to be like, wow, if I do this correctly, I get this reward on the other end, I just need to make sure I love this process of using the

tax code to get these rewards. And if I fall in love with this process, I'm going to fall in love with documenting, I'm going to fall in love with keeping my receipts, I'm going to fall in love with sharing with other people that I'm doing this correctly. Now I'm taking more videos and more documentation because I realize that the tax code is now a system that doesn't work against me, it works for me. It's a tool to help me grow and build my wealth. So you've fallen in love with

the tax code? Absolutely. How much are you paying in taxes? I paid at 0% in income taxes last year. This past year, I'll probably end up paying somewhere around a quarter million in taxes off

almost eight figure net profit. Is the goal to always get it down to zero? No, the goal is not to get

it down to zero. This year I'll pay taxes intentionally. I personally would love to always pay 0% in income taxes, but paying 0% is not always the goal. And the reason I say this is because most people who pay a very little in tax, but make a lot of profit have to reinvest a lot of money into tax advantage vehicles in order to pay a little bit in tax. I have obtained so much in loans debt in order to acquire so much real estate in order to acquire so much depreciation just so I

can offset my tax bill. Don't get me wrong. I love having real estate. I love having tenants paying for my properties and mortgages, but that's a lot of investment properties that I had to go get. And that's a lot of liquidity that I had to put out in order to build that investment portfolio. I'm building wealth with the tax code. And a part of that requires me to spend money, where part of that requires me to get illiquid at times. And for many taxpayers,

they may not like that as they make it's uncomfortable. Carlton, uh, interest rates have been super high. I don't know if I want to jump into real estate. Oil and gas have been super speculative. I don't know what's going on with the hormones straight and all this other stuff going around the world. I don't know if I feel like investing in gas. Well, those are the things that the tax code wants you to do. Those are the legal incentives. Whether interest rates are higher or not, the

government needs affordable housing. They can't provide homes to everybody. So are you going to be a

blackout yesterday. What was that about? Interesting. We need energy. Are you going to invest in

solar and oil and gas? So these are the things that the government can't do in abundance. So instead they'll write it into the tax code and say, hey, I'll give you a 30% tax credit if you go to this. I'll give you depreciation if you're willing to be a real estate investor instead of just a whole

“owner. If you go out and do this is the key point, right? You have to go and spend money to pay less”

in taxes. 100%. That is correct. And that's how most of the tax code is set up. There's only a few strategies where you don't spend money to get money back. I know. Only a few. So many people are like, but what about Elon and what about Trump? Then they're not paying any taxes. How come I have to pay taxes? Elon and Trump don't make the same type of income that many taxpayers make. Many taxpayers make earned income. Elon and Trump don't make earned income. They make what's called portfolio

income. They own corporations and they own investments. And when you own corporations and you own investments, you can take loans against your stock, which is non taxable borrowing against your own value of your company. You have liquidity to be able to go invest in assets that can hopefully give you an arbitrage on the debt of the interest rate that you took from your own corporation, your own stock. And a lot of this, as you were saying, is done through real estate, which means you have to

put out money to get money off your taxes. Can we break down the bonus depreciation when it comes to short-term rentals? Oh, yeah. When it comes to short-term rentals, what the IRS says is that if you are able to run a Airbnb or VRBO business and your tenants are staying in the property

“seven days or less, you have what's called an active real estate business, but you have to follow”

one other test, which is material participation. And material participation means that you're actively involved in the day-to-day operations of the property. Up to a certain amount of time. Many taxpayers realize that the IRS has a rule where it states that if you spend 100 hours materially participating, you have an active short-term rental or Airbnb business. Well, now how do we get the depreciation from short-term rentals to offset W2 or 1099 income? When you buy an investment property,

let's just say the investment property is $500,000, and you put a 20% down payment, so a $100,000 down. You bought a half a million dollar asset, and the IRS is going to let you write off the four half a million dollars on your tax returns, excluding land value. So that right off of half a million dollars is going to be divided over 27 and a half years, which is the depreciation amount that you receive every single year, over 27 and a half years. Many taxpayers aren't going to wait

27 and a half years to receive all of that depreciation, so you can implement a strategy to accelerate depreciation. And that strategy is called the cost segregation study. The cost segregation study is very simple. You're just getting the cost of all the things inside of the property, cosmetically, and outside of the property, cosmetically, that you can write off in a quicker amount

of time. Things that would never last 27 and a half years, such as appliances, flooring, windows,

doors, nails, drywall, heating, air condition, HVAC. These items are never going to last 27 and a half years. And because with the one big beautiful bill, we have bonus depreciation now at a hundred percent, any of these items that aren't going to last 27 and a half years, you can write them off

“in one year. That is beautiful. But the only way you're going to be able to do this is if someone did a”

study on your house. So you need two strategies here. You need the cost segregation study, which is done by an engineer and a CPA. The engineer comes to the house and takes an estimate of all of the materials that make up the property. And then a CPA will come back and calculate how much depreciation you get. So if you would love to receive a hundred and fifty thousand two hundred thousand dollar deduction on your tax returns by buying a five hundred thousand or six hundred

thousand dollar property, you can do so with a cost segregation study and bonus depreciation, running a short-term rental. How much does that cost? Cost segregation study is typically based off of square footage and can range anywhere from a thousand dollars to, I've seen some costs eggs go as high as twenty five thousand dollars on some larger scale commercial building. So but there

always, you know, within reason relative to the tax savings that you're going to receive, right?

If you're putting a five thousand dollar investment into a cost egg, you're getting a two hundred thousand dollar deduction. That seems like a win to me at a 37 percent tax rate. So it's usually worth it. Yeah, it's always got to be worth it before you make the investment. And I see a ton of videos out there of how people saying they have W2 income, but there are paying zero dollars in income tax because of a short-term rental and cost segregation studies, but there are for sure limits on that.

That's correct. Can you explain? Yeah, the IRS has what's called excess business lost limitation rules and they update these excess business lost limitation rules every single year. So last year in 2025, I believe the excess business loss was three hundred and five thousand if you were single and about six hundred and ten thousand if you're married filing joint. What that means is that if you buy a short-term rental and you do a cost

up to three hundred and five thousand of W2 income as a single individual or up to that six hundred

“and ten thousand if you're married filing joint going back to last year. And then in two thousand”

twenty six, they did lower that a little bit further. But what this benefits you is is that you get to claim those losses against W2, anything that's excess losses will just roll over into the following year, ready to offset your new forms of income that you make in the following year.

So we had a tax payer last year that made about half a million dollars W2, single.

He used the full three hundred and five thousand excess business loss had an extra hundred thousand dollars of losses that he gets to apply this year before the excess loss. Now, since the losses that you don't use get rolled over. So overall you like short-term rentals as a tax hack. I like short-term rentals as a tax hack, but taxpayers have to be willing to run legitimate short-term rental businesses or else they'll invest the money just to get the tax savings.

And then they have an asset that's not performing well. And then they get pretty upset if they have to cover their own mortgage payment in the following year because they ran it as a short-term rental just to get the tax benefits at the end of the year. And then the following year, no one's

renting their property because they never knew how to run a real short-term rental. They never really

got great furniture for it. And the photos look like every other listing that you see on Airbnb.com. Yeah, I worry about stuff like this because you actually have to then go deal with people. Hmm. Like people want the short-quick fix, right? Get a big juicy tax right off. Yes. But now you have a short-term rental and now you have Bob in the rental and he's calling you and the toilet's broken and all this stuff like we have to fast forward with that actually

“looks like in your day-to-day life and if that fits with your lifestyle. 100% you have to think”

with the end in mind. But one of the strategies that I like to give my clients Nicole is when they do a short-term rental in the last few months of the year, let's just say October, November, and December, they can get those 100 hours within a three-month period. That's not too hard. But the IRS has no rule with you transitioning the property and the following year to a long-term rental. So if you ran the property as a short-term rental for the last three months out of the

year, October, November, and December, you manage the property for a hundred hours. Your guests stayed in the property seven days on average or less. We have an active property. We can do a cost segregation study. Get the losses against W2 income. And then right when January 1 hits, you can call up a property manager, transition it to a long-term rental. And now you have it ran as a property manager. You can then go get your next short-term rental towards the end of the

“year, only really manage real estate for about a hundred hours every single year in order to be able”

to capture these losses. So this is a strategy that some of our clients will play into is utilizing the short-term rental strategy, but only timing it right at the end of the year. So they don't have to run a short-term rental for 12 months, only three months out of the year. Oh, that's still a lot of work. Are you in this game? I used to be in the short-term rental game. I'm no longer in the short-term rental game, just in multi-family now. Why? Because it was a

pandemic. Well, it was a breakthrough to get me and my wife to work together and for her to leave

for W2 job. And that was beautiful. And as our businesses started to grow and we started to become more and more profitable, buying short-term rentals for our tax strategy no longer made sense. Plus, I actually had other tax strategies that were giving me even bigger deductions than rental real estate at the time. So I started layering other strategies. I started moving into multi-family, which gives much better returns and actually has the ability to sell a lot better

when you're looking to exit out of these properties in the future. And has been able to serve my investment portfolio and definitely my lifestyle as well. Another big popular real estate hack is the Augusta rule. Yeah. You talk about that a lot. The Augusta rule is a tax strategy that not too many tax professionals are familiar with. The Augusta rule was created out of necessity because in the state of Georgia, there's a golf tournament that goes on every single year. It's called the Master's

Tournament. And unfortunately, back in the 70s, there weren't enough hotels and motels to house, residents, and tourist, and travelers coming from out of town to be able to stay for the 14 days for that tournament. So you had homeowners that opened up their homes for seven days or for 14 days the two weeks of the tournament to foreigners and they were making a lot of money. The city of Augusta, Georgia, allowed for those taxpayers to not report 14 days worth of rental income on their tax

returns. The following year, it became a federal tax law code section 280A. And now, business owners are utilizing that tax code between their house and their LLCs or their S corporations. What it means is if you have a business meeting or a fundraiser or a party that you like to throw for for business purposes, you can go rent out a venue and go pay somebody else or you can choose to

in your S corporation and rent your house to your S corporation for 14 days. Maybe you're charging $2,000 a day and it needs to be fair market value. That's a $28,000 deduction. Right then in there, you just paid yourself from your S corp to yourself personally $28,000 and that income is non-taxable. That is one way of business owner can immediately save money on taxes without having to spend money.

“So, let me break down those elements. Do you have to hold the house or can you be a renter?”

Does it have to be your primary house or could it be a short-term rental? And then on the entity side does it have to be an S corp or could it be an LLC or a C corp? Glad you asked that. So, those are three very important questions to ask. Number one, do you have to be a

homeowner? The answer is yes. Number two doesn't need to be your principal place of residence. Yes,

it needs to be your primary residence. It cannot be a secondary home and it cannot be an investment property. It needs to be your primary residence. And the third one is, "Can you do this in a single member LLC?" The answer is no. Because the single member LLC is considered a disregarded entity and is associated technically to your social security number. So, if you're a sole proprietorship or a single member LLC, the answer is no. If you're an LLC taxed as an S corp or you are an S

corporation, the answer is yes. If you're a partnership and you're a 1065, can a partnership do this absolutely you can? Can a C corporation run out the place and be able to do it as well? Yes, you can do it through a C corporation as well. Is this why you're obsessed with S corps? I am obsessed

with S corps because so many taxpayers stay in LLCs far too long versus doing the math to determine

that the benefits outweigh the cost of them switching over to an S corporation to avoid some of the

“self-employment tax that you pay as a taxpayer. Explain when you should switch over. Yes, it's”

different for everybody and is based off of your situation, but by rule of thumb, if self-employment taxes 15.3%, you're paying that on all of your business's net profit. Over time, you can choose to take a salary from your business and only be subject to 15.3% on the salary you're taking out of your business. So, in order to do that, you kind of need to be making enough profit to draw that salary. The issue that most people are unaware of is when you transition from like a single

member LLC to an S corporation, there's just more compliance involved. Now, you're issuing yourself a W2, you're following a corporate tax return versus just a single member LLC tax return. So, you're at many of straight-of-cost is probably going to jump from like maybe $1,000 a year when you're following your single member LLC tax return to maybe closer to $3,000 to $5,000 a year. So, if you're trying to save money on taxes just by switching over to an S corp,

you're probably going to want to know, Carlton, if I have to pay $3,000 to just be an S corp, when did the benefits away the cost to me switching? And it's right around 50 to $60,000 in net profit. Right around that amount, you can cut yourself a nice little salary of about 15 to 20 grand. You're only going to pay self-employment taxes on the amount that you gave yourself in that salary. Unless you say the other 40,000 of that 60 grand is not subject to the 15.3% self-employment tax.

It's only going to be subject to federal taxes now in state taxes. So, you might walk away saving about $5,000 to $7,000. That's around the time that somebody should be considering switching over to an S corp is when their profit is cross 50 to 60 grand. You call the S corp a wealth machine. Why? Because the S corp operation can be pretty awesome to play some games in.

You can play games with how much payroll you give yourself and maxing what's called this QBI deduction. Hang on with me here. QBI stands for qualified business income deduction. And guess what? It's 20%. But it's only if you're underneath a certain amount of business profit. If you cross, let's just say for example, over $400,000 in net business profit, you may not even receive any of this 20% QBI deduction.

So, I might strategically have you take payroll 100 grand or 200 grand reducing your business net profit. So, you can qualify for that 20% Qualified Business income deduction.

Why is the S corp so powerful? Because I can also help you avoid some of those payroll taxes

if I choose to lower your payroll. So, there's just different things that you can do with the S corporation that the LLC owner cannot do when it comes to compensation and QBI.

“What other considerations should people think about when they're opening or they're choosing their entity?”

glad you asked this question one of the biggest things that people should think about is what is going to be the name of my entity and what is going to be the state that I set up my entity and if you're working in a 1099 capacity yourself employed, you're most likely going to have that entity set up in the state in which you operate in and that's completely fine. I'd highly recommend that you don't associate

to godaddy.com, they get their website set up, they set up their LLC on legalzoom.com, they create the address associated to them and then they go pay for a registered agent and then boom, your information is public information. The moment I become an upset client with you, whether you're a doctor physician selling me t-shirts and the tie dye off of the t-shirt, got on my beautiful skin, I can go online and find your LLC where it's associated to. Take your address, type it in a

Google and now I can find information on who you are and where you live. Listen, one of the scariest things that my clients hate is when we see that their LLCs are associated to their home address,

we immediately address it on the first call with them. We pull open Google Earth and we're zoomed in

on their primary bed, we're zoomed in on the primary bedroom and we're telling them, is this is this what you want us to see and what you want your clients to be able to say? Absolutely not. How can we protect you? Because business is a marathon, it's not a race, it's a marathon.

“And in order for us to stay protected, you have to be protected from the IRS, you have to be protected”

from creditors. Creditors are almost worse than the IRS sometimes. Lawsets can almost punish you way more than the IRS can punish you. So can we structure you in a way to where your personal information is protected? So when we end up amending their operating agreement, amending their articles of organization, getting them a virtual address, so that way their public information, their children's bedroom and the Google screenshots that were taken, other vehicle sitting inside

their driveway is not information that the world can now see. So where you associate that LLC

is so, so important. What about people that want even more privacy and they set it up in Delaware or in Wyoming? Yeah, this is when we talk about entity layering. So one of the beautiful things about having an entity is you can have an entity that owns another entity. So I'm operating my business here in California. Well, California doesn't really have animosity laws. So maybe I decide to set up an entity in California that's owned by a parent company in a state like Wyoming.

You might ask, well Carl, why would you go to Wyoming? Well, Wyoming has different laws in California of such one of the beautiful laws of Wyoming is Wyoming does not require managing members names to be at the public or county assessors office, meaning if someone looks up my entity in the state of Wyoming, they're just going to see the registered agent and the name of the entity, but you're not going to see the manager's names, the members names or the fact that that entity

owns a California entity. So for many taxpayers who use states like Wyoming, Delaware, and Nevada, they might be able to fly underneath the radar because of those states discretionary position. It's just for liability. Just for liability. And you mentioned an alphabet soup. It reminded me of QSPS, which has also changed recently. So if you are an entrepreneur and you're starting to do really well and you're thinking about potentially exiting your business,

“why should you think about QSPS and why should you think about it early?”

QSPS is pretty cool because if you retain your stock ownership over the course of five years in your structure as a sea corporation, you can avoid capital gains when you have an asset so or sorry, a stock sell and you're exiting out of your business up to 40 million. And for some taxpayers, they might even be able to get a multiple on that up to 75 million under certain circumstances.

Why is that powerful? I mean prior to the one big beautiful bill, it was closer to about 20 million,

15 to 20 million. So for many business owners that were selling their businesses for $100 million, they're experiencing $80 million just hitting them all at once. I mean, that means the government's going to walk away right away with $30 million. Well, this just helped out many taxpayers that just put an extra 20 to 25 million right back in their pocket, right? So if you're somebody that's considering selling your business in the next five years, one of the things that you can look at

doing is what does it look like for you to transition from an LLC or an escort operation over into a sea corporation? What is it going to look like for you to start paying yourself, dividends, or giving yourself a salary out of a sea court versus taking distributions out of an escort? Because when you do transition to a sea court, you will sacrifice some things. You'll sacrifice the easeability of just being able to transfer money from your checking account over to your personal

checking account. You can't do that with the sea corporation because every time you touch the money, it's a taxable event. But if the long-term vision is, I'm going to sell this for a multiple. Well, maybe you make that sacrifice right now and you go to a sea court right now, knowing that the QSBS is there to help you. This is just another incentive in the tax code that's written there to help you. Yeah, we started the clock for a QSBS switched over to a sea court. It definitely is an

added layer of complexity that's a nice way to think about it. But also, it is a big strategic move, and I think recently the big beautiful bill also allowed you to amortize different years.

“So before, right, you should be all or nothing. That's right. You should be all or nothing.”

You can amortize different years. And one of the things that many taxpayers will also do, they might set up consulting escort operations to their sea corporations. So maybe you have an operational entity. That's the product. And you're going to go take that

But maybe you have a separate S corporation that operates as a consulting entity.

Why would that be beneficial? Well, you want to keep profit as high as possible inside of your sea court. Because you want to have a strong EBITDA when you get ready to exit, but you don't want the double taxation. So you might choose to, your corporation might choose to hire your consulting entity to do consulting work for your corporation. And that's a one way in which money can move over from a sea court to an LLCRS corporation where you're able to take distributions

that are untaxed. This gives many taxpayers who are self-employed the ability to control money without a being taxed yet. How'd you, you're looking at me like, you know? I'm looking at you like I feel like you're participating right now. Like okay, she threw the QSBS at me for a reason. So I'm eager to hear all one, some of the things that you're working on.

That's exactly what we're doing. That's awesome. So let's talk about one of my new favorite

tax moves, you too. I have a 15-month-old daughter. Children on payroll. Yeah. Children on payroll. I mean, children are so expensive. I think it's time they earn their keep. So I pay my daughter. Yes. Do you pay your daughter yet? I do pay my daughter now. Okay. And what should people keep

“in mind when they're putting their kids on payroll? You have to keep in mind reasonable compensation.”

I know we all want to max out 16,116,100. That's the new standard deduction. What that means is is that you can pay children up to 16,100 without them needing to file a federal tax return. Depending on your state, you may still have to file a state tax return because states have different standard deductions. But let's just stick with federal for right now. The big thing is that when you're employing children, they have to be doing reasonable work and making reasonable

compensation. A lot of taxpayers understand that they can make their children child models. But are they actually child models? Are you actually taking photos? Are you just keeping some photos inside of your iPhone? You need to be intentional about it. It needs to be on the calendar. You need to create a contract with them. You need to have a bona fide intent of what they're doing and you need to transfer the money to them. The smart thing to do is also to take it to step

further and to look at a Roth IRA. You can set up a custodial Roth IRA for your children, tuck away another $7,000 for them. And that money is growing tax free in a tax advantage nature.

“And for many taxpayers who start this process very early, I believe at the age of five,”

you can put in $7,000 and by the time your child is 60 years old without making one additional

contribution, there should be nearly about a million to a million one inside of that account.

So that's a very powerful wealth building tool for an entrepreneur that wishes to get their children involved. I think it's 7500. It's 7500. Yes, for the Roth IRA, 7500. And so is that what you did with your daughter? Yes. So we're placing my daughter on payroll. We didn't give her the full 16,100. We gave her just enough to where we can make the full contribution into the Roth IRA. And that was intentional. One, I don't believe there are too many,

you know, two-year-olds making 16,000. And in the year, I can't spot too many of them online. But that being said, because of the amount of involvement that my daughter did have as a child model supporting us on social media, we decided to make that contribution to her Roth IRA after we made the payment to her. And you alluded to how powerful the Roth can be because the tax treatment, when you take that money out, it comes out tax-free. A lot of people don't realize that when they take

“their traditional IRA or their 401(k) out, you have to pay taxes. And the reason why I'm always”

going to advocate for the Roth, especially right now is because one, we're in the lowest tax period that we've ever been in, at least in the last 50 years. This is the lowest tax race that we've ever had. And two, when I ask people, do you think taxes are going to go up in the future? Most people will tell me, yes. I mean, nine and ten people will tell me, you know, I feel like taxes are eventually going to go up. So if you think taxes only have one direction, which is up,

does it make financial sense to just put everything into a traditional or a traditional 401(k) knowing that you have no idea of where those tax rates are going to be when you can make the sacrifice right now, go Roth 401(k) or Roth IRA, pay the tax to know and have that peace of mind that when you draw it out layer, it's a hundred percent tax-free. But the catch is that you can't make more than 153k as of 2026. But you know, the tax code has its games. What you can do in two steps,

you is legal that you can't do in one. It's called the "backdoor Roth IRA" and it's becoming increasingly popular. What you're doing is you're making a non-deductible traditional IRA contribution. You're putting in the 7,500 knowing that you're not going to be able to duck down your tax returns intentionally because what the IRS will allow you to do is flip it into a Roth IRA. That is on allow you to pay the tax on that 7,500, so you can get that money

pushed into a Roth IRA account and then grow in a tax advantage nature. And you can do a mega backdoor. Yes, as well. What is that look like? With a mega-backdoor, you're making a contribution by, well, there's two ways to actually do a mega-backdoor. I'm going to talk about the self-employed who's doing a mega-backdoor. If you're doing a mega-backdoor, you can give yourself a salary and set up a "sep" ira and contribute up to $69,000 to a "sep" ira and then convert the "sep" ira into

for a self-directed Roth? See, here are all these headlines about Peter Tio growing billions of

“dollars within a Roth thing. You don't have to pay taxes on. Yes, so the self-directed Roth ira is”

actually something that not too many taxpayers know about. But if you choose to, you can direct your investment funds to yourself, controlling what assets you wish to invest in. You can choose to invest in a business. You can choose to invest in real estate. There's taxpayers that we have that own section eight properties inside of the Roth IRA, just completely paid off, just cash flow in inside of there. You can invest in some some types of private equity deals

through your Roth IRA, some types of reach through your Roth IRA, and everything is in a tax advantage in nature. Everything is growing tax-free. One thing to keep in mind is that the money does return to the Roth IRA, any deductions that you're receiving, such as rental real estate deductions to appreciation, the IRA receives those deductions. And you can't have your own business. You can't have your own business. Absolutely, you can't. Yeah, if you have a self-directed

“401(k) driver. I didn't invest in my own business. Sorry, no, no, you cannot invest in your own”

business through a Roth IRA. I thought you said can I have a business and then and set up a self-directed Roth IRA. No, but like the big thing that they were talking about with Peter Teele is that he owned part of PayPal. And so putting something that you have you have no shares in the Roth IRA was growing in a tax advantage nature. Yes, but your own business interest cannot be invested through the Roth IRA. You're correct on that. What are some crazy tax tax that people might not know

about? Some crazy tax tax that I really like now is leveraging film investments. This is probably the one that I've spent a lot of time on over the last year. IRC181 allows taxpayers to deduct 100% of production costs in the United States. If the movie film is filmed in the United States

and remains under $20 million. Now, I'm not a movie person that's going to go and create a movie,

but I sure do like watching Netflix and Amazon Prime. And what movie producers will do is they'll sell or finance the production rights of the movie film to investors. As an investor, you're taking on recourse debt, plus you have your at risk capital. The money that I'm putting at risk to invest in the movie film. You're taking on a loan to get the rest of the ownership of the movie film and the loan is deductible just like when you buy a vehicle. So we have taxpayers that put in,

you know, $100,000 into a Jackie Chan movie or Mark Wahlberg movie and they're getting a leverage deduction of $400,000 right off in year one. With material participation, they have to spend 100 hours watching other movie films and being involved in the direction of how they direct their dollars into that film. It's a pretty, pretty awesome tax strategy. And so with material participation, the at risk capital, our clients like it because it gives them

consistent cash flow. Movie films do provide a consistent cash flow. The cash flow does go back to

pay the recourse debt, but at least they were able to get the sizable deduction in that first year

that they made the investment. So it's a way in which they can, you know, be exposed to something that's a little bit uncorrelated to the, you know, public markets like, you know, real estate

“and being something that can also provide cash flow. How do you find to deal like that?”

Movie production companies. Our advisory firm is actually pretty close with a lot of the production companies here in California. And when they get film projects that they are going to put 181 financing behind, we get contacted and we're able to offer these opportunities to our client. What's a tax scam that people should watch out for this year? Because it's just getting I would watch all for charitable LLCs right now. There's a lot of taxpayers that are

looking into setting up these charitable LLC structures where the charity is, or where there's the ability to donate money that's going to acquire land through a charitable LLC structure that provides a 4x leverage deduction or a 5x leverage deduction and a part of the charitable LLC structure allows for you to be able to have your own investment LLC where you might be able to take loans to it. I don't like that structure at all. I think that it can be abused. I think that

it's structured in a way that doesn't protect taxpayers. A part of that is being pitched by attorneys that are stating that investors are able to pull their money together and do this as a group almost like a fund to shield investment dollars and the whole thing just seems like tax evasion to me, for lack of better, for lack of a better term. And if you're someone that's watching this podcast right now, there's so many other vehicles that you can set up where you can be philanthropic without

having to go through a not very well structured charitable LLC structure in order to just get a multiple on your investment dollars. And so what it's being pitched at is if you put in like $100,000

your tax returns, which is pretty awesome. That person that has those excess business loss,

“loss limitations that we're talking about earlier doesn't have to worry about that because”

that has nothing to do with excess business losses. It's not a business loss. It's a charitable deduction, right? You can take as much charitable deductions as you want. So that is something that would just be very cautious about. You can take as much charitable deductions as you want, can you? Well up to 50% of your adjusted gross income or 30% of cash. Are there other AI driven tax scams that you're worried about? That's really great. None that I have seen thus far, but we were

having a conversation around AI and tax, and the fact that many taxpayers are using AI right now as tax consultants in getting their tax information documented. But the one thing I would caution them of, which is fine that they want to use AI to help make things easier in the tax world, is just keep in mind that if you're using AI to validate what you're doing, AI does not represent you in the IRS courtroom. You will have a human being there, not AI, and you will have to

represent yourself unless you have a CPA or tax professional. And if you did all you're consulting

“with AI, and then you go hire a CPA and tax professional. You have to go re-explain everything”

him. And almost guaranteed it's not going to go the way you would want it to go. So I always caution

people that are using AI for tax strategy advice, still keep your tax professional on your team, because they're the one that's actually going to end up dealing with the audit and signing off on the tax return. Make a total sense and don't upload everything. Yeah, and don't share everything with AI, right? I mean, there's a lot of financial information that you can choose to provide AI in order to get data given back to you, but uploading your AI in rapport, it's ensuring social security

numbers and data that is really meant to be personal, can end up hurting you in the future. Well, there are so many tax hacks and it's so exciting to think about all of the options that you could do and all of the strategies that you could implement. Where do you think the balance is, right? Like, should you just live your life and do the best within these parameters? Or should you really be gearing around these particular strategies so you can save the most possible? It's like

“the tax tail wagging the dog. Should you make decisions purely based on tax ramifications?”

Absolutely not. No, there there becomes, you know, that divide where lifestyle and peace of mind matter far more than attempting to take actions that, you know, can take you away from moments and memories in your life. That being said, the cost of not knowing is very great.

Those who choose to never approach the tax code don't, don't realize what they're sacrificing.

The tax code can give you the ability to invest instead of overpay the ability to be present which your family, the ability to not spend three, four or five months out of the year simply working for the IRS. So I absolutely believe it's a tool that can help you and open up more freedom in your life. And at the end of the day, I believe all of us want the same thing. We just want more time to spend with our families and loved ones with the absence of fear of money. And that's

what the tax code is able to provide to you. We end all of our episodes by asking our guests for final investing tax money tip that they can take straight to the bank. We talked about so much. All right, but what else? One more, you mentioned family foundation. It was literally the last one I wanted to give. You know, people think philanthropy is just about giving money away. It's a wealth building tool at the exact same time. The wealthy have been using foundations in so many ways

and just let me just write a check. You can write a check, which is totally fine, but money people that have foundations are controlling wealth. There is no capital gains tax. Inside of private family foundations, which means you can own precious metals, real estate stocks. It could appreciate to whatever amount. There is no capital gains tax. You do not have to donate all the money that's inside of a foundation. Only 5% of the assets inside of a foundation have to be donated

every single year. You can contribute your own cash to a foundation outside of just stocks or highly appreciated assets and be able to take up to 30% of your adjusted rows income as a year one tax reduction in the following year. If you don't want to make any more contributions, RS says that's totally fine. Your foundation can be a non-performing foundation and you can just take a year off for two years off. As long as you stay within IRS compliance and you follow your returns,

reporting information, it's 100% compliant vehicle. Many taxpayers also that are utilizing the private family foundation, who wish to be philanthropic with family, will hire their family members inside of the private family foundation. Which then that becomes an income shifting strategy. They're shifting income to a private family foundation and then shifting income downward from the foundation to children or family members that might be in lower tax jurisdictions. So it's just

a great wealth building tool and done correctly.