Healthy Wealthy & Wise Accountants

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Kreig Mitchell: [00:00:00] The thing that I didn't realize is, you know, I was probably I see it in younger folks now. They hop jobs a lot and they move around. And I think I always thought that I had to do that to learn and to see different things and get a different perspective. And I had to at my generation. But I think today is different. You know, I think a lot of people would be better off staying where they're at and building a portfolio of clients and really building up their knowledge sets.

Heidi Henderson: [00:00:31] This podcast is sponsored by Engineered Tax Services, a subsidiary of Engineered Advisory, whose goal is to support CPAs and their clients to achieve the highest and best use of time and resources. Etfs offers specialty tax services and incentives, which help expand your capabilities and ensure that your clients are paying only what is required in taxes and nothing more. To learn more about engineered tech services, go to engineered tax services and mention the Healthy Wealth and Whys Podcast to receive project discounts and a free CPA Partnership e-book. Hi, everyone. This is Heidi Henderson, and you are listening to the Healthy, Wealthy and Wise podcast for accountants. I am really passionate about people and the industry and I truly believe that the accounting industry can do better for both our clients and its professionals. So I'm going to share insights from people who have found professional success and who have managed to balance that with their physical, mental and personal health. So I hope you enjoy and I hope you get inspired. Accountants Can Earn Free CPE From listening to this episode, just visit earmark CPE. Download the app. Take a short quiz and get your CPA certificate. And now on to the episode. Hi, everyone. Welcome to today's show. My guest today is Kreig Mitchell with Mitchell Tax Law out of Texas. And if any of you have worked with me in the past and asked any really technical questions or wanted referrals to someone, that's really fantastic in tax law, particularly with interesting or complex real estate related issues or R&D issues, you probably know of Kreig Mitchell or I introduced you to him because Kreig has been someone that I personally and at Engineered Tax Services we have worked with for many, many, many years.

Heidi Henderson: [00:02:34] He's been an incredible resource with us and he is a wealth of knowledge in terms of his background. His resume is lengthy, so I'm not going to go into all the details because I'm like, Craig, tell us a little bit about the story. And this podcast might be a little bit different than some of the previous ones that I've done, although I do want to dive into Kreig personally, getting to know him and how he manages all the ins and outs of of life along with being a successful business owner. I do want to get into some technical topics because I get a lot of the same questions from clients as they relate to real estate, real estate, professional designations, the issues with audit, dealing with the accelerated depreciation. And then Kreig is just incredible on the R&D credit side as well. So I want to be able to share that with a lot of the listeners. Might be a little bit more technical, like I say, than than typical. But I think Kreig is such a wealth of knowledge, we would be remiss to not take advantage of it while he's here. So, Craig, Craig, thank you so much for joining.

Kreig Mitchell: [00:03:33] Yeah, thank you for having me.

Heidi Henderson: [00:03:35] Okay, so let's start from the beginning. So where are you originally from? Where did you grow up?

Kreig Mitchell: [00:03:40] I grew up in West Texas, so a little town called Odessa. It's oil and gas country.

Heidi Henderson: [00:03:47] Oh, wow. So you're still in Texas, have you? But. But if I recall, there was a time when you were not in Texas, Right? So you've moved around.

Kreig Mitchell: [00:03:54] I did. I moved all over the country, actually. So I've I've got a little bit of wanderlust and I've moved everywhere.

Heidi Henderson: [00:04:01] Okay. But it sounds like you must be a Texan at heart because it's called you back and that's where you're currently residing in your business is based in Houston, right?

Kreig Mitchell: [00:04:10] That is right.

Heidi Henderson: [00:04:11] Okay, perfect. One thing I didn't mention in the intro is that you were a former IRS auditor, which I think is really fascinating, too. So I always love to pick your brain about what was that like. But before we get there, tell us a little bit about your background. I mean, what is your story? How did you get from growing up in Odessa, Texas, to having gone through all these different phases of your life that have led you today to Mitchell Tax Law?

Kreig Mitchell: [00:04:39] I guess probably started with law school. I went to Texas Tech Law School, and at the time the dean was pretty upfront. He this he was clear that this was not Harvard. And, you know, I really I signed up for a federal income tax class. And believe it or not, it was taught by a first year professor who had just left the IRS national office.

Heidi Henderson: [00:05:03] Oh.

Kreig Mitchell: [00:05:04] Yeah. And so I didn't know it at the time, but I disagreed with everything that professor said.

Heidi Henderson: [00:05:11] So that's.

Kreig Mitchell: [00:05:12] Crazy. Yeah. As it turns out, he he had spent the last ten years dealing with the IRS's response to the Revenue Restructuring Act of 1998. So he was on the the position, if you remember, those congressional hearings from back then, they were IRS abuses and Congress was really running the IRS through the wringer. And he was the one of the procedure attorneys in the background that was trying to defend the IRS. So he had a very slanted view, in my opinion, of the IRS. And he was still very much in favor of the IRS. And everything the IRS is doing is correct. And it was exactly the opposite of my thinking at the time.

Heidi Henderson: [00:05:54] Wow. So that's pretty interesting. So then how did that lead you from going to law school with a professor that you did at the time maybe you didn't even recognize that you disagreed with, but then ended up working for the IRS?

Kreig Mitchell: [00:06:09] Yeah. So I, I the disagreement was very apparent for it got hooked me. I knew I was on the opposite side. If that's the IRS position that I was on the opposite side. And so, you know, I like I said, I moved around the country a bit and I in doing different positions, you know, one, one of the times that I actually applied for the IRS was during the financial crisis and the firm that I was working for was having some financial problems. And just on a whim I happened to apply. I went to the IRS interview and I actually told them at the interview that I am not interested in working for the IRS, that really I just was curious and was there. I had done controversy work for about ten years, I think at that point, meaning tax court. Privacy on the other side protects payers. And believe it or not, they hired me. But so that that's how I got to the IRS.

Heidi Henderson: [00:07:08] Wow. Okay. And. And you worked in the in the space of audit. So you were dealing with auditing taxpayers on. Were you in kind of a specialized area or was it just in general any type of tax return?

Kreig Mitchell: [00:07:21] Yes. So I started at the SBC, which is the small business group, specialty tax group for estate and gift tax. So I was an estate and gift tax attorney. But the the attorneys in that group only do audits. Hmm. And so I audited some of the largest estates on the West Coast at the time I was stationed at my workstation was in Oakland, California.

Heidi Henderson: [00:07:46] Oh, okay.

Kreig Mitchell: [00:07:47] Yeah, I did.

Heidi Henderson: [00:07:49] I think you were going to answer my next question, which was how long were you there or did you stay with the IRS?

Kreig Mitchell: [00:07:54] I stayed a couple of years. So I you know, every day that I went to work, I used it as a learning opportunity. So unlike someone who's there for a real job, I was really there just to learn all their secrets. And that's I made No, no, no. I didn't ever hide it. And so you would see me often on my floor. You would see me up on chief counsel's floor. You'd see me over in the appeals office. It's because I was engaged and I wanted to learn everything I could. And so I. I worked for the estate and gift tax group for a couple of years, and then I went to the I transferred to the IRS Office of Appeals and worked as an appeals officer. And that was in Chicago.

Heidi Henderson: [00:08:33] Interesting. So how I mean, you and I have worked on some audits together with some different clients. The process is very fascinating to me with how it works. We probably don't want to dive into that today because that's a that's all we could talk on that for hours. But what what then led you to leave there was your goal to eventually go out and and have this knowledge that you were learning or that experience you were getting to be able to start your own practice and represent the other side? Or what was your ultimate goal?

Kreig Mitchell: [00:09:05] Really? That was my goal of going to the IRS is just to learn everything I could. And so once I a couple of years into it, I kind of quickly realized I wasn't learning anything else. And so really, I just went back out to practice. So I kind of everything was accomplished that I wanted to you know, I'm not a career government person.

Heidi Henderson: [00:09:24] So yeah, it's a little bit of a different, different game, especially than being entrepreneurial because now you've got your own business. How long have you been in business for yourself?

Kreig Mitchell: [00:09:33] So I've been I've had my own practice for, I think, seven years now.

Heidi Henderson: [00:09:37] Mm hmm. How has that been?

Kreig Mitchell: [00:09:39] It's been interesting. I know. I should say right when I left law school, I also had started my own practice. And so that that was a completely different experience. Technology has completely changed the practice. So the things that I struggled with in the past, you know, billing and tracking and, you know, the IRS sends everything by paper, just keeping up with the paper, the whole system and apps and tools we use today in my current practice make it so much more enjoyable and better.

Heidi Henderson: [00:10:11] Yeah, that makes sense. I mean, that's I think in this recent the the Inflation Reduction Act that was passed, it was so fascinating to read through the budget that there they have allocated for the IRS. And yes there's a lot of new agents and I think people are honing in to this 87,000 new agents that they want to hire. But what I found fascinating was the amount of money that they were looking to put into technology and even something called the callback system, which, you know, like I called Delta, and Delta is like, oh, it's a, you know, seven minute hold, let me call you back. That sounds great. You know, the IRS has got a massive budget to try to create the same thing for themselves because, you know, currently you could be on hold for 3 hours and have a courtesy disconnect. Is that the extent of their technology there? So I'm sure it's quite different and of course, innovative to to be able to to have your own firm and adopt all of this new amazing technology that we get every single day. You know, they're they're big enough, I think is very difficult for them to maneuver. So as far as, you know, again, this podcast is kind of healthy, wealthy and wise. We like to incorporate everything, you know, all about the whole person. And I've known you for a long time, but not really that much on the personal side. So about you personally, what what do you love to do? What is your passion?

Kreig Mitchell: [00:11:28] Well, I have some younger kids. We had kids a little bit late in life. And so, you know, currently in my life, I enjoy all their sports. I I'm I'm kind of that dad that just takes my kids everywhere and people that know me. If I'm not with my kids, they're wondering, where are your kids? Me?

Heidi Henderson: [00:11:44] That's great. And how old are they?

Kreig Mitchell: [00:11:47] So my kids are seven, nine and ten.

Heidi Henderson: [00:11:50] Wow. Well, those are awesome ages. And what sports are they playing?

Kreig Mitchell: [00:11:54] How they play every sport. So it's.

Heidi Henderson: [00:11:56] Oh, my gosh.

Kreig Mitchell: [00:11:57] Yeah. So I you'll see me sometimes. Basketball. Soccer, Baseball, gymnastics. And swimming, you name it.

Heidi Henderson: [00:12:04] Wow. So how do you manage that with I know that we've talked about your tax law, but you have an aspect of also doing tax returns and doing some tax prep working on the side for clients. How do you manage to balance all of those things with wanting to balance time with your family, raising your kids with having your own business and handling tax deadlines, and the constraints of not just owning your own business, but anything relating to tax? Usually it tends to be quite controlling from a time standpoint. It does. How do you you know, what are some of the practices you've deployed to help manage that?

Kreig Mitchell: [00:12:41] Yeah. So I like to tell people we are a teaching law firm in the sense that, you know, we it's hard to start as an attorney. You know, the reason why I had to jump around and I'll move all over the place was because I it's hard to learn what you need to know to be a good, really good tax attorney. And so here at this practice, we we bring on new attorneys and we basically train them from ground up. It's a huge investment of time. But the tradeoff is I get to delegate work now. So, you know, all the hard time consuming tasks, I actually have people to help.

Heidi Henderson: [00:13:15] Amazing. Well, well, that's pretty that's pretty interesting strategy. So then how does that work with I mean, I'm guessing that you have turnover, which would be difficult. I mean, is your goal at some point to sort of train someone that would would stay with you long term?

Kreig Mitchell: [00:13:33] It is. But at the same time, I'm grateful for any time they're here. And I think it's a great trade off. It's it's something I didn't have when I was starting out. So, you know, even if I'm training my next competitor, I don't care. There's enough work out there that I enjoy the time they're here. I like working with them, and that's just how I've been doing it for the last seven years.

Heidi Henderson: [00:13:54] That's interesting. You know, it's funny because I talked with someone actually on the podcast recently who had a very similar mindset with a CPA firm, and I thought it was interesting because I feel like it's it's a different mindset. And so often, you know, we're looking at how can we retain these people and how can we hang on for the long term and have the long term goal, you know, of having to move up the ranks and take over as a partner or whatever. But there's certainly value in that perspective. So I appreciate that. And it's, you know, I would imagine there's some intrinsic value for you and feeling that you've made a difference in helping train and sort of grow someone up in the space.

Kreig Mitchell: [00:14:28] Yeah, that is true. And we don't have a lot of turnover, but if someone was to leave, I would probably help them do so because if that's what they want, that's what I'm going to help them do. Right? So, you know, you know how work is. You get to know people and you want the best for them, right?

Heidi Henderson: [00:14:45] Yeah, yeah, yeah. Absolutely. So as far as your business, then shifting gears a little bit into your focus in in your practice, do you have a specific, I guess, vertical or focus in which you specialize?

Kreig Mitchell: [00:15:00] Yeah. So, you know, we, we kind of have the controversy side that meaning disputes with the IRS and we do we do a lot of those and it's really because we're pretty good at it. And that's for me working at the IRS, asking every employee what works, what doesn't work. So I kind of have some insight there that a lot of people don't have because who else is going to be able to ask 100 IRS employees, What are you working on? What do you do and what works on your type of cases? So I do those because we're really good at it and I enjoy the work. But as far as technical tax goes, most of my clients in most of the issues I work on do tend to focus either on credits and incentives, R&D credits, bonus depreciation, kind of kind of things that are more challenging.

Heidi Henderson: [00:15:47] Mm hmm. Definitely some of the technical areas. I know that that's where we've all worked together. And I mean, you've been such a huge resource for us because there are technical aspects in those areas of incentives and real estate and R&D credit specifically that gets so technical. And you know, we've got ten people reading through the regulations and we still can't figure out what they're saying. And it really isn't even about sometimes what the regulation says. It's about reading between the lines and trying to interpret what they mean by certain things in the code. And so do you feel like your time that at the IRS or I guess I should just ask you open ended early, How have you been able to kind of evolve into a better understanding of reading between those lines?

Kreig Mitchell: [00:16:35] Yeah. So I, I guess again, it comes back to the work you do, right? And so the nature of my work is usually people come to me when they can't find the answer, and then the other time they come to me is when the government thinks it has the answer and it kind of fills in the blank for you. So I've always kind of learned from the iris in the sense that the IRS gets pretty creative sometimes. And so if you see their thinking and how they do it, you can do just the opposite on your side. Right? Mm hmm. So it's kind of filling in the blanks in a way that, you know, I always have my ear set on. What would they be saying about this? But the opposite of that is also true. What the taxpayer in me saying, because the same analogy works in reverse.

Heidi Henderson: [00:17:17] Yeah. Well, you and I have worked on a couple of cases. You know, I think talking first about the R&D credit specifically there, there's one pending issue that's kind of looming. It's actually gaining a little bit more traction, I think a little more heat right now because we're coming up on the period of time it takes effect. But there's there's these two issues that you and I personally have been in D.C. We have been talking with our legislators and trying to bring awareness to certain issues as it relates to the research and development credit or R&D credits or in the code. It's R&D credits, research and experimentation. So for those credits, you know, the two areas we've been looking one, we've been dealing with architects and engineers and really making sure that the IRS is being fair with that industry as it actually is defined in the code. Will you explain to listeners a little bit about. I think what's interesting is not without, I guess, diving into the entire issue, why there's been a bit of a discrepancy with especially the small business side of the IRS when they're looking at R&D credits, particularly with the ones we're seeing the most audits has been with architects and engineers and why that's been a struggle. So you and I have kind of gone through this process. I think it'd be interesting to kind of share that with our our viewers.

Kreig Mitchell: [00:18:35] Yeah, sure. So the R&D credit is one of those unique codes, code sections, unlike many code sections that are just straight deductions, you know, on a deduction, you can just look at a receipt and you can say, oh, that receipt says it's, you know, X dollars and I can add up all the receipts. Well, the R&D credit goes further than that. It has a kind of element that you can add up to it, but it also looks to activities. And so any time in the code when you see an activity plus an expense in the two are married together, those are really challenging for the IRS to audit. And so that challenge also is a challenge for taxpayers to comply with. And so Congress set the R&D statute up this way. So on the issues that we're looking at that are coming up on audit, currently, the government is taking a position for smaller architect firms that services don't qualify. And so you can see the challenge from the IRS's perspective of it's a it's a there's not a list of receipts. They can just add up like they can on all their other audits. So they have to really get in there and understand, well, what is it that the client is doing or the taxpayer is doing? And because of that, there's been some conclusions that the IRS that services in particular don't qualify. Now, that's not in the code. The code actually looks to activities and the code actually sets out that it's a product or result. And it has. But but again, the auditors are skeptical. And so if it's not clearly stated in the code that something qualifies, they often take a position that it does it. And I think that's what we're seeing with this particular issue.

Heidi Henderson: [00:20:13] Mm hmm. Yeah. And I know our firm. I can't speak for other firms, but our firm in doing R&D credit calculations, our calculations are being done by. Educated tax attorneys with years and years and years of experience in just specifically working with businesses as it correlates to this one area of the tax code. What is the typical background of an IRS auditor on the small business side?

Kreig Mitchell: [00:20:37] Yes, So the small business side, usually the qualifications are a couple of accounting classes. Many will have a bachelor's degree in accounting. Very few are actually CPAs even, and hardly any or attorneys.

Heidi Henderson: [00:20:50] So basic accounting background probably have not spent any time in public accounting. If I understand it correctly, and then certainly not any type of higher certification from a technical standpoint.

Kreig Mitchell: [00:21:03] That's right. And and typically, they have several years of experience at the IRS. And again, most of that experience is is working cases where you're you're kind of adding up receipts. So it's a different it's their background when they come in to the R&D credit is biased towards hey, this is different and they're already on the defensive because it's different than what they've done for the last several years at the IRS.

Heidi Henderson: [00:21:27] Yeah, well, that's been the interesting challenge. And so just for listeners, it's been an interesting process because we've been kind of explaining this process to some of our legislators in D.C. to talk about this issue. And we've made fantastic headway. I think it's helped a lot and really explain because it is very technical, but a lot of our auditors in this area don't have that technical background for which to effectively audit these types of of credit claims. So again, we're making headway, which I think is really positive. There's been some positive turns. The second issue we've also been dealing with is this issue of the amortization rule. And I want to bring this up because, you know, I've seen numerous it was a tax alert that went out yesterday. A couple of things are kind of making some noise because this takes it took effect in 2022. But essentially the impact of that will be felt on the 2022 tax return when those are filed. So we're coming up right now. We're at the end of 2022. If you're listening to this later on, we have been lobbying to extend this time where they're going to implement this amortization rule, which, Craig, why don't you explain what the amortization rule is first off, and then we'll kind of talk about how things are looking with that.

Kreig Mitchell: [00:22:38] Sure. So so the research credit has a couple of criteria. And one of those is you have to have an expense that that is eligible to be expensed under Section 174. And so that's that's in the R&D tax credit statute. So it kind of pulls in this other code section under 174. So what happened was in the rush to enact the Tax Cuts and Jobs Act back in 2017, it really was a rush. It kind of got pushed through really fast without a lot of review. But in the trade offs that they were making, they they put in there this change to Section 174, and there was no discussion or comment about how that would impact the R&D credit because nobody was thinking, well, wait, this also ties in to the Section 41 for the R&D credit. But all they were trying to do with the change was basically instead of allowing you to immediately deduct R&D expenses under what, 74, you have to spread them out over time. So that code section previously gave you the option to do either you could either deduct them immediately or you could spread them out over time.

Kreig Mitchell: [00:23:45] And so, again, the change wasn't intended to impact the R&D credit at all, but by taking it away. Now you've got a question of how does that impact the R&D credit? And it wasn't until probably a year or two later until people had an aha moment and wait, this impacts the R&D credit. And so the impact on the R&D credit is essentially if you the R&D credit is calculated in part off of wages. So if you employ a bunch of employees who are doing research, you can either deduct their wages or you can take an R&D credit. You generally can't double dip. And so the question for this change is under 174 is it can can you truly not double dip? So is your credit going to be reduced, your R&D credit going to be reduced or are you going to give up your wage deduction? And so that's what you have to grapple with. Now, am I taking an R&D credit and losing a very large wage deduction? It's almost a penalty for taking the R&D credit.

Heidi Henderson: [00:24:46] Yeah, Well, one one question that we had that we're we're working through and I had a conversation with an architect recently who is reaching out to A.i.a at the larger national organization to really talk about supporting architects who are claiming R&D, because our understanding is that this amortization rule essentially says that wages that are qualifying research costs or expenses now must be amortized over five years. So let's just say we've got you know, we've got this $100,000 wage cost. Typically we're going to take that $100,000 against our income. And that's your. Expense for the year under the new rules. If this is if this is research activity, this would be spread out over five years. So they'd get a $20,000 deduction and then 20,000 each year for the next five years. But essentially, they're not getting this $80,000 deduction, the additional 80,000 that they have been historically getting. The the question is, if if let's as we're talking about architects, let's use the scenario of an architect. If an architect is claiming our D credits, clearly those wages have been sort of extrapolated from the larger bucket of costs as research expenses. And let's say they've been claiming for the last three years now they decide, well, I don't want to claim R&D credits against those wages. I'm just going to leave them lumped in to just my general wage costs. How how would that work? Would that so could they go back and say, okay, I changed my mind? This isn't research activity. This is just regular salaries and wages and I'm just going to keep deducting it. But I won't take the credit because I don't want the penalty. I mean, how are how is that going to be handled?

Kreig Mitchell: [00:26:28] So the iris is supposed to be working on guidance on this very issue right now. I can tell you, I think in the industry, nobody's complying. They're just doing it however haphazard they think is right. But it is it does raise an interesting question of, you know, if you've been taking the R&D credit, you've admitted that these are these wages are research and development wages. Can you immediately next year not take a credit and somehow just conclude that they're not R&D wages, meaning they're not caught up in 174 or they're deductible under section 162? Mm hmm. There's no answer to that. And it gets more complex, actually. So the R&D credit, you don't get 100% credit for all the wages. You actually have to compare it to a base period. And it's the difference, the increase in spending. So if your wage expense went up from a base period to the current year, so you're not getting a 100%, all those wages are not actually being fed into your R&D credit. So what about those? Where do those go? Mm hmm. Nobody knows.

Heidi Henderson: [00:27:31] Interesting. Well, again, this is a little bit of of something we've been lobbying for, as well as to extend this amortization rule. We do have support. We've seen support from both sides. You've been involved in this as well. Do you have any updates in terms of where things lie with that and and any potential change or extension on this amortization rule taking place?

Kreig Mitchell: [00:27:55] It's actually been seriously considered on several of the last rounds of legislation. As as it turns out, there has to be an appetite for tax issues on different rounds of legislation that come out. So this is going to be tacked on at some point to some bill, and it'll eventually pass, no doubt, because it just doesn't make sense and it's really complex. But so it'll be get fixed eventually. But as of now, I don't believe it's on any pending bills to to to be changed. But again, the next administration that comes in which we'll be seeing not too far off in the future, we'll probably see another big tax package and they will probably be part of that. That would be my guess.

Heidi Henderson: [00:28:36] Yeah. Yeah, it certainly sounds that way. So again, for for listeners, it's been interesting. It would impact how those expenses or those wages are handled for the 2022 tax returns. And I think how the R&D credits are essentially going to be affecting clients, which again, it is some gray area, but we do have support to delay the application of that. So there's a good chance that if that occurs before tax filing is upon us, then we expect that that that will happen. We'll just kind of continue doing things as they go. So we'll hope for that. But again, it's a it's a little difficult to getting some of these things passed. So with that, you know, that was complex. But I think, again, pressing, we have a lot of questions on that. So I wanted to talk through it. Shifting gears a little bit now to the real estate side. Well, actually, first off, I have one question as it relates to just incentives in general R&D credits, as well as this bonus depreciation, some of these other incentives, Do you think that these incentives truly drive action by tax payers? I mean, they're incentives to help push certain activities. Do you see those be effective?

Kreig Mitchell: [00:29:46] Yes and no. I have seen some very, very clear examples of where it has. I'll give you an example real quick. I worked on an audit of a client. I won't disclose too much here, but they had a very large project that this engineer thought he could pull off when everybody in the engineering space said it couldn't be done. And he took a big financial risk to do so. Not only reputation risk but financial risk. I again, I'm not trying to give away too much here because confidential. But essentially he took that risk on and he did so. Knowing that he could get an R&D credit for doing so. We're talking about 100, a couple hundred million dollar project. So that that project was successful. He made his practice, it built his reputation, and it saved the clients who as a government agency, it saved them untold millions upon millions of dollars. So the public benefit that came out of that R&D credit that he got was magnified in our economy time and time again because of his gumption of taking the risk. But at the heart of it, it was because of the R&D credit.

Heidi Henderson: [00:30:57] Wow. That's really that's a really interesting story. I like that insight and that that does bring it home. Aside from just simply looking at incentives, you know, for what they are. So that's interesting.

Kreig Mitchell: [00:31:09] Now, there's the other side. I also see a lot of clients who and maybe this is the way the incentive should work is it really just lowers their tax and but it lowers their tax because they're doing highly innovative things that, quite frankly, most of this design work that the R&D credit in particular incentivizes can be done anywhere in the world. They're highly mobile design. Design work usually isn't tied to a site, a specific site. So, you know, is is the incentive intended to reward those who are doing that technical work in the US? Because if that is the incentive, then absolutely, yes. I see that time and time and time again. What I don't see our clients who are taking the credit and are just shrugging their shoulders saying, Well, I'm not going to do that work anymore because I got a credit.

Heidi Henderson: [00:31:59] Yeah.

Kreig Mitchell: [00:32:00] Usually saying, Oh, that's awesome. I'm going to take more of that work on, right? I'm not going to you know, if I have a choice between two projects and one I think is going to qualify for the credit, I'm going to take that work.

Heidi Henderson: [00:32:10] Mm hmm. Yeah. Yeah, I can see that. Well, and we see that to get on the real estate side with the bonus depreciation, I think it is an absolute driver of activity. And we see taxpayers making decisions based on the tax benefits because it absolutely shifts the ROI for certain projects. So the real estate side, it's been interesting to see how that's been impacted since it was adopted in 2008, 2017 and applying to these these real estate projects. So with that said, let's let's dive into real estate a little bit because you're so good on that. The technical side of real estate investments and investors and structuring. I get asked quite a bit about grouping rules and I wanted to see if you could share a little bit about how the grouping rules work and if that's something that you see used often or if it's something that should be used more often because we deal with a lot of investors, of a lot of property and the question comes up sometimes.

Kreig Mitchell: [00:33:13] Yeah. So, so grouping is, is one of those interesting decisions you have to make when you fill out your tax returns because there's there's a benefit to grouping and sometimes there's a detriment. And so it's a little bit of a strategy to, you know, think through of of how you fit into these rules. But for real estate investors, if the typical scenario is you have one piece of real estate that's throwing off losses and may continue to throw off losses just because of depreciation deductions and you might have other properties that are profitable. And again, the difference between the two might just be because one has financing with the high interest rate and you're deducting the interest. So, you know, there isn't often there isn't a property that you're thinking, well, it's losing money or it's making money when you factor in the interest costs and the depreciation. But the grouping rules play into this. Usually when you're trying to group, what you're trying to do is you're trying to say, well, wait, I have some real estate that is probably producing a loss after depreciation. And so the question is, well, how can I make sure that that loss I'm able to take advantage of that loss. And so the passive activity loss rules come into play here, and they have some material participation rules. I know I'm throwing out a lot of terms there, but material participation, there are some rules that you have to basically meet and some of those rules based on ours. So if we're for example, one of them is you have to work for or have to have 500 hours or more to be able to say I materially participate. And that is a prerequisite to sometimes getting your deduction in the current year.

Heidi Henderson: [00:34:54] Mm hmm.

Kreig Mitchell: [00:34:54] So if you group if you group properties, sometimes you can count activities on more than one property for that 500 hour test. If you don't group activities, it can sometimes be probably very hard to say. You spent 500 hours on one property.

Heidi Henderson: [00:35:09] Oh, okay.

Kreig Mitchell: [00:35:10] And so that's the background of the grouping rules. There's there's a lot more to it than that. But that's the strategy of sometimes you group to net a income property with a lost property, okay? Sometimes you're grouping to because they're all lost properties and you want to take that loss against your other income. So it kind of depends on why you're grouping.

Heidi Henderson: [00:35:34] Yeah. So, so that doesn't happen automatically. Like if you've got, you know, let's say you own five rental properties and two of them you've got losses this year because you did improvements and you know, just started renting it. These other ones are spitting out a lot of profits. If they're not grouped, they're not going to automatically offset each other as they come trickle down to the individual's tax return.

Kreig Mitchell: [00:35:55] That's right. So the if you. Don't make a grouping election, You have to apply the test to each property individually.

Heidi Henderson: [00:36:00] Oh, okay. Interesting. Okay, So. So we use the grouping rules to be able to kind of combine all that together. And then that leads to the next question, because the next one then is there's a huge strategy of of taxpayers trying to ensure that they do have or qualify for material participation as a real estate professional. I always have to caveat this that I think for the accountants I'll understand we're talking about for tax purposes, but for other listeners, the real estate professional designation is a tax designation. It really has nothing to do with being a real estate agent or being licensed or anything like that. It's more or less this determination that the courts have defined as to whether a real estate activity or property is truly something you're actively working on versus it's just kind of a passive investment you use on the side. So can you dive a little bit deeper into that material participation? And what what are the goals set aside for that by the IRS?

Kreig Mitchell: [00:37:00] Sure. So so the rules are found in the code and the regulations. And like you mentioned, there are several court cases that interpret them. But so there's there's concept of material participation and there's one set of rules there. And then there's a separate code section and a separate regulation that that is for real estate professionals. So real estate professionals have slightly higher requirements than material participation, but it also includes material participation. So, you know, think of it as to be a real estate professional. You've already materially participated because the tests for real estate professional are higher, more stringent, I should say. So those tests really there's two of them. One test is that you have to work 750 hours or more on your real estate activities. And then also if you have any other activities that are not real estate, those have to be 50% or less. So your real estate activities have to take up most of your time.

Heidi Henderson: [00:38:00] Ken And so then that leads us to the question of how do people work through this who have a another job, they have a W-2 or they have a salary that they're receiving for something unrelated. Probably the most common ones. We see a lot of doctors. We see a lot of attorneys. We see a lot of dentists who are buying real estate and really building their real estate portfolios while still practicing. How how do they have to look at that to determine material participation as a correlates to those positions and then the real estate?

Kreig Mitchell: [00:38:32] Yeah. So there's a number of strategies and, you know, the these rules that we're talking about are nuanced. And so the nuance actually creates some of the exceptions, right? Is so, for example, one way to to kind of comply with the rules to be a real estate professional is you get to count the time of both spouses. So if you have one spouse who's working and one spouse who's not a W-2 job, the spouse who does not have a W-2 job could maybe manage all the real estate and all that time could qualify. So you can kind of combine the time of husband and wife. That's one way. The other way to be a real estate professional under these rules is is basically to have passive income and not worry about it. So, for example, let's say you can't be a real estate professional. You might be able to make investments into things that throw off passive income to offset your passive losses. And so a good example is it's a classic. There's a court case on it is a doctor who has a W-2 from from being a physician, has a bunch of rental properties that are throwing off losses because depreciation, but also decides to run part of this practice through a medical surgical center. And that's passive. He doesn't actually work in the surgery center. And so the the the income from the surgery center could be very substantial and that income can offset his real estate losses.

Heidi Henderson: [00:40:06] Interesting.

Kreig Mitchell: [00:40:07] So interesting. So we see that another one, I guess it is more of an exception to the real estate professional because you don't need it. But is the short term rentals. So the Airbnbs, the you know, the the vacation rentals, those are not treated as real estate. So they're not per se passive. So you're all you have to do is materially participate in those. So there are there are a number of little nuances in kind of ways around these rules. But the gist of all of them is you're you're able to use up your real estate losses against your income. Yeah.

Heidi Henderson: [00:40:42] Well that's that's such a huge key with this, you know, this onset of bonus depreciation on existing homes or real estate buildings and being able to offset that active income. So back to the short term rentals, I mean, this has been and. Question about do incentives actually drive taxpayers or drive activity? I think this is one that absolutely I personally have seen significant increase in activity. First off, in just overall transactions, the number of transactions occurring because we deal with a lot of high income earners who are buying real estate to be able to use the large deductions and offset income. And now this really big movement toward short term, short term rentals, which, you know, this whole all of a sudden Airbnb and, you know, this whole thing, you know what, ten years ago didn't even exist. Now it's this whole thing and we're starting to see regulations start to cut back on the availability of short term rentals in certain areas because it's getting a little out of hand. But I think it's really shifted because of the tax benefits. So back to material participation on the short term rentals. So because that's viewed as more business activity, then how is that booked differently on the tax return than, you know, a long term rental that's more passive?

Kreig Mitchell: [00:41:57] It it is you know, a short term rental is is actually treated as a business. So it's a Schedule C business. And you know, as a business, it's just reported that way. It's not treated as a rental on a schedule. E And so the it's interesting because you know that if you ever own a short term rental, you, you kind of understand why it's treated as business because it actually does take more work to do those.

Heidi Henderson: [00:42:22] Mm hmm.

Kreig Mitchell: [00:42:22] But that extra work does. Any losses that are thrown off does make them eligible to be offset against wages and other items.

Heidi Henderson: [00:42:31] And and without regard to this 500 hours, is that right? Or the 50%?

Kreig Mitchell: [00:42:37] Well, you still have to materially participate. And so to materially participate, there's a whole series of roles that have ways to qualify for that. One of which is you can you can have 100 hours. Hmm.

Heidi Henderson: [00:42:50] Interesting.

Kreig Mitchell: [00:42:51] So if you if you ever had a short term rental, you will know that 100 hours is not hard to meet because of the turnover. There's some work involved, right?

Heidi Henderson: [00:42:58] Yeah. Yeah, absolutely. Well, yeah, I mean, I wanted to have this conversation because, again, these are questions of scenarios we face every single day with a lot of our investors and a lot of people looking at ways to help reduce income tax when they have a lot of income. How can they invest this income to help continue to to grow that build their portfolios? And if they can reduce their tax liability and use that money they're paid to the IRS to to reinvest, then it's kind of a win win for those investors. So, you know, with everything that you've learned way back to go to college, sitting with that professor that was somewhat questionable in his opinions or bias, I should say. If you could go back, what do you what do you wish you knew? What would you tell your 20 year old self that you know now?

Kreig Mitchell: [00:43:48] You know, I've had a lot of opportunities. I've come across a lot of great people over all these years. I'm looking back on it. So, so many great opportunities and people out there that the thing that I didn't realize is, you know, I was probably I see it in younger folks now. They hop jobs a lot and they move around. And I think I always thought that I had to do that to learn and to see different things and get a different perspective. And I had to at my generation. But I think today is different. You know, I think a lot of people would be better off staying where they're at and building a portfolio of clients and really building up their knowledge sets. So if I were talking to my 20 year old self, I probably would say find something, a niche practice area and stick with it. You don't don't really need to jump around and do all that. You would be better off long term, you know, and again, I've had this practice for seven years. I could have easily started this practice many years ago, but it's building your client relationships and really helping people and getting out there. And the sooner you do that, the better.

Heidi Henderson: [00:44:57] Yeah. Yeah, I think that's a good perspective. And today, again, back to turnover and staffing issues, we're seeing that a lot across the board, not just in the accounting industry, but with all businesses dealing with turnover and a lot of competition with people pulling others out to give them higher pay. And you know, I think that your perspective is so valuable because if you really sit back and think about it, just because someone's willing to give you a little bit more money doesn't always mean that's the best decision. That to your point, being in that place, building those relationships, building that network, building your client base, those things probably have significantly more value over time than than jumping ship to another opportunity, maybe at certain times. So might be, you know, something to speak to some of our staff, people who are out there who are trying to figure out what they want to do or, you know, being recruited left and right, because that's the big thing right now all over in the country. So really interesting. Well, Craig, your insights are always so helpful. And if listeners want to reach out to you to chat with you about any of these topics, tax related or law related, tax law related, what's the best way for them to contact you?

Kreig Mitchell: [00:46:12] Yeah so. Website Mitchell tax law there's phone number on it. Just give us a call.

Heidi Henderson: [00:46:18] Beautiful. Great. Yes. And feel free to reach out to me as well. I've got Craig's email signature with a scheduling link, which is very handy for me. I always love that, Craig. But Craig, thank you so much for your insights. You always bring so much to our clients and you always are able to answer questions timely in a way that I can rely on and I know that our clients can rely on. So you've been incredibly invaluable to us, and I just appreciate you always for being here. So thanks again for joining. Hope everybody enjoyed the the podcast and we'll talk with you again soon.

Kreig Mitchell: [00:46:52] Thank you.