Saving BIG On Taxes Requires The Right Paperwork

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Heidi Henderson: [00:00:00] 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 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 CPE certificate. And now on to the episode. Hi, everyone. It's Heidi. And today we have Geoffrey Dupnik is our guest with Light Source Consulting.

Heidi Henderson: [00:01:36] And Jeff and I have actually worked together, I think, for almost ten years. Jeff, It's kind of like creeping up on us, which is amazing. Sometimes. It amazes me to look back on things like that. But I wanted to bring Jeff on the show because he has a really different and interesting niche and he has really built a practice. He is an enrolled agent and he's built a practice of consulting with taxpayers, with strategy. And you know, it kind of is similar to what he does, but in a different capacity. And it's been fascinating to see how he's working with a lot of clients, but also working with CPAs collaboratively to look for all these different solutions and to pinpoint areas where taxpayers have opportunities to invest in alternative investments or other things in tax strategies, or even just documentation for different things that he can deploy with his clients in the way that he works with them. So I thought it would be a fun, interesting conversation to kind of dive into what he's doing and really how he got to where he is first off. So with that, Jeff, let's start first with just some background. How about let's let's go back. Where did you grow up?

Jeffrey Junek: [00:02:47] Grew up in San Antonio, Texas.

Heidi Henderson: [00:02:50] Wow. Oh, nice.

Jeffrey Junek: [00:02:51] I went to high school and graduated from University of Texas, went there, played volleyball for University of Texas. I was a setter. Oh. And then I would go back with a kinesiology degree thinking I was going to go to med school. But let me tell you, a 3.2 GPA does not get you into med school. So from there, I went in the working field, went to work for Fox Television, but we were not selling television advertising. And I worked my way up to beat all the way to a GM, to running TV stations. And then I met my beautiful bride here in Florida, and the company asked me to move to Los Angeles, and my wife's family is here. My wife says, Nope, I'm not moving away from mom. So okay. So I resign from there and then I start my own business and online marketing company did quite well with it. Sold that company. Then I'm saying what I'm going to do is start working for a tech consulting company. About 12 years ago, and the stuff I started learning there realized in business developments are learning. There is like, where was this advice at when I was a business owner? Because the bias I was getting from my CPA was like, Hey, Jeff, first deductions out there, but this is the price you have to pay for being successful. I'm thinking I'm missing something in the boat and fell in love with helping clients out because I was that business owner and it it sucks, you're know making good money but paying higher taxes. And from there I left that other firm I used to work for. It started my own business and I've been very successful for the last four years doing that now.

Heidi Henderson: [00:04:17] That's very nice. Yeah. Like I say, I mean, it's been interesting to see what you've been able excuse me, what you've been able to implement and how that's worked with some of our mutual clients that we've done as well. And before we dive into all the tax technical stuff, I like to get into the fun stuff first. I didn't know you played volleyball. I played volleyball and track. And the my daughter was also volleyball and track. Okay. I didn't know you had a kinesiology degree, which I think is fascinating. So the whole premise of this podcast, healthy, wealthy and wise, although we'd like to focus on some tax technical stuff and strategy of building our firms and thinking outside the box, I am really trying to plug in this aspect of of our ability to actually create some balance in our lives and that it's okay to take care of ourselves and important to take care of ourselves physically and mentally, as well as being strong and successful professionals. So before we get into the tax technical stuff and because you brought up volleyball, I think being a college athlete gives us a really interesting perspective. You become a little bit addicted. Certain things you do tell me about, you know, tell me from that aspect, how do you balance your work life with your staying physically healthy and balancing all that stuff?

Jeffrey Junek: [00:05:35] Great question. It's hard, but the competitiveness in you, if you played sports, you it's not like lifting weights or jogging. You have to win. If you play a competitive sport, you have to have the competition. So even when I travel, I try to find pick up volleyball games, go to here, play pickup games. I coach for 19 years because the love of the game for me is important to me because I feel that it got it gave me a college education. And when you step on anything athletic, what does it do for you? Like when I step on the court, all my worries go away. Your mental side is better. You met some great people, great great, great friends. And if the game can give you that much, what are you giving the game back? So I coached for 19 years. I coached girls volleyball from 12 year olds to 19 year olds. I coach Olympic festivals, highest in club in high school. And that was a lesson for the girls. I said, Hey, look, if you're on the court and all your boyfriend problems go away. Your mom and dad problems go away, your teacher problems go away. You're in a good mental place. And if the game's giving you this much, are you returning that to the game in practice right now? And I try to do that even with this business. So this business I run now on my own has given me so much financial freedom. Time to take off when I want to take off with my family, not when someone dictates me to take off. So this company could do the same thing after the same thing for the company and work hard for two.

Heidi Henderson: [00:07:06] Yeah, well, I think that's a pretty great philosophy. And it's interesting because I do think that like I'm an advocate for kids in sports, not because I'm a huge sports fan per se. I honestly, I'm not a football fan. I don't I don't like to watch sports on TV. But I do feel like it it provides an outlet. It keeps kids busy. It teaches a different worth ethic and drive. And to your point, I was so fortunate in that sports paid my way through school and it paid my daughter's way through school. And it was the greatest gift. But not only that, going to school, you had an automatic community. You didn't have to go make a bunch of new friends because you walk right in and you've got your teammates. And that creates a social environment that is so strong and has so many auxiliary benefits for us the rest of our lives as we deal with teams, as we deal with the interaction between people in our lives and how that correlates to what it's like on a sports core.

Jeffrey Junek: [00:08:05] Yeah, it does. You're right. But it also teaches accountability and what's and what sports for me, like you said, the youth now is my son just committed a full ride for baseball for University of Dayton at University of Dayton as a pitcher.

Heidi Henderson: [00:08:16] Nice.

Jeffrey Junek: [00:08:17] Congratulations. Hey, I'm paying the $66,000 a year for college now. Amen. But with today's social media, I think sports are so important for kids because there are so many negative things. How the kids have to look a certain way or act a certain way. And sports can build confidence for especially for young women out there. And I think that just having a young lady play sports and build your self-confidence because they get beat up every single day on social media and having those coaches, good coaches out there, mentors in the athletic area is so important for our youth.

Heidi Henderson: [00:08:50] What what a huge point. I was at a conference last week, CPA conference, I was chatting with another woman I six foot tall, and there was another woman there about my same age, and she walked up to me and I said, Oh, hi. And she goes, Oh my gosh, someone else, I'm looking, I love a lot. And she was also six foot tall. And we kind of laughed and chuckled about that. And we got to talking about, you know, fine, but, you know, certain things could be a pain finding clothes or whatever. And it sort of transitioned to How about your kids and how were they? It was difficult for them. And my daughter is six foot one, six foot two. And I can tell you that because she played volleyball, she loved and appreciated her height, whereas if she was not doing that, it would have been such a battle, such a struggle for her socially to be in the school environment where she literally, no pun intended, stuck out like a sore thumb. Yeah, because, you know, because of that. And so yeah, that, that sort of fitting in and getting that confidence and finding that confidence with who they are, who they are or their skills and strengths is, I think, such a gift that athletics can provide. Yeah, I totally agree.

Jeffrey Junek: [00:10:06] It is. You know, you hate to say that, but women in girl sports are already told that, Oh, you can't do this because you're a girl. You know, boys do this and girls do that. But you tell these young ladies, No, you can only think of home. You back is your mind, your mental state. You can do anything you want to if you just focus on it and work hard on it. And building the girls confidence was my biggest goal as a coach because they come in beat up already. So my first three weeks of coaching was making them feel good about themselves, believe in themselves. Then they can drink my Kool-Aid as a coach, then I can coach and then you can't coach. And they have to believe in themselves. But I give it by your daughter. My son. Six foot six.

Heidi Henderson: [00:10:41] Yeah, I. Yeah.

Jeffrey Junek: [00:10:43] Oh, yeah. He is tall. And so he stands out. Say, Oh, how tall can you play basketball? He's like, not play baseball. What?

Heidi Henderson: [00:10:48] Yeah. What's wrong with you?

Jeffrey Junek: [00:10:50] Yes, exactly.

Heidi Henderson: [00:10:51] Well, that's amazing. I mean, I think one last point again, we'll get on to the technical stuff, but this is fun stuff. Yes. That I find that sometimes these confrontational conversations are really serendipitous for me because I call me weird. There's something to when I'll have a thought or be thinking about I should do a podcast on this or something resonates with me, and all of a sudden it just kind of happens. And that's what's happening right at this moment because what I was thinking about just yet. Yesterday as I was I was out. I was out doing something. Oh, I was. I was actually I ride horses. I was out working with my horses. And it was a really it was a hard day. And I was like physically exhausted and it kicked my butt for some reason. Like, I was like, oh my gosh, I am breathing so hard, sweating and, you know, it's cold outside. And and I thought to myself, we have to remind people that exercise and being healthy doesn't have to be you have to go to the gym and get on the treadmill for an hour and you have to go lift these weights and do these exercises that if you can find something you're passionate about, something you just enjoy doing. And it's playful, that that can literally be the best form of exercise and hone in to that. Because then the you said, when I'm traveling, I go see if I can get into a pickup game or play volleyball somewhere. And that absolutely resonated because I was literally just thinking about that yesterday.

Jeffrey Junek: [00:12:18] Is that's my that's my exercise not running. It's I'm a gun in the court. I'm competitive a person. Yeah. And you know like people tell you I love being on your team, but I hate playing against you.

Heidi Henderson: [00:12:29] Perfect. So have you done that Ever since college, you've just kind of managed to kind of stick with that and.

Jeffrey Junek: [00:12:35] Have I can't play volleyball. I kind of pick a basketball game. Nice. It's it's that it's that I guess that adrenaline you get from winning and competing. Yeah. If you're an athlete, you're, you know, it's so hard to find how can you compete because that that that urge to compete and to win will always be there. So I have to focus that with my business and and and travel and find that time because if you don't find it, you just got this built up energy just awful healthy. So you have to get that escape somehow.

Heidi Henderson: [00:13:03] Yeah, absolutely. 100%. I think especially when you travel. I totally agree. I had Darcy Casey on. She was a guest and she was saying that she makes it a point in every city to go do hot yoga in the morning, no matter time zone difference, no matter how difficult it is to get up and, you know, just just to move literally changes everything with with traveling as well. So I couldn't agree more. So if that's any motivation for anybody, you don't have to go to the gym, go do something you love, go find a game. Yeah. The biggest thing right now, I think it's hilarious. My kid, my daughter got really into this now, apparently it's the thing. Go play pickleball.

Jeffrey Junek: [00:13:39] In South Florida. It's all it is. But it's great, though, because you think about how many sports can 65, 70 year old people play the elderly and they can go out and play pickleball. And it's great.

Heidi Henderson: [00:13:50] And it's social. So, yeah, so go play. Don't feel like you have to work out, you know, find something you enjoy, start a game and have a great time. So anyway, that was a fun little tangent. I'm happy we kind of went down that path because I felt like again, it was serendipitous. But with that said, let's shift gears now. Tell us about some of the things that you are doing with how you're working with clients.

Jeffrey Junek: [00:14:14] So what I do is really I focus on two areas, right? I first, I focus on the common tax savings that every single CPA knows that they can do. But the problem with it is that we as business owners don't have time to use deductions the proper way. When I say that, it's really the documentation side behind it. And so CPAs don't want to apply to clients and by the way, hire kids, but there has to be proper steps to do it because if they do it wrong and don't have the documentation and then they get audited, now they're in trouble. You know, So what I do is really focus on looking at clients who are business owners anywhere income from 100,000 outlines that make $10 million a year. And the very first step I do is look at where your personal expenses and I go over those personal expenses with them and then try to convert a lot of those I can to true business expenses because they really are with just a couple of change of habits and the proper documentation behind it. And then from those tax savings, I look about where you went for retirement because at the end of the day is people don't realize IRA accounts are great for in K or the qualified plans are great, but they're taxable later on. And so I tell people all the time and says, Let me ask you a question. If I give you a loan, Heidi, this is going to give you a loan for 35 years from now. But I'm not going to tell you what the interest rate is going to be. And you pay the interest at the end, the loan, the term. Is that a good loan?

Heidi Henderson: [00:15:36] Terrible.

Jeffrey Junek: [00:15:37] Well, that's what qualified plans are, because we don't know what the taxes are going to be 30 years from retire and years from now. And so qualified plans have have their place. But there's other alternatives out there that are tax free benefits for retirement. So you have to have all those buckets, taxable bucket tax bucket and the tax one bucket, but trying to convert a lot of that income to tax free bucket when they retire is the second part. I do. Right.

Heidi Henderson: [00:16:05] Well, okay, so you're helping kind of convert some of those things and get them set up for six.

Jeffrey Junek: [00:16:09] Different alternative investments are different types of ways of managing the money. And I don't manage the money because I look at myself as a connector. I don't sell any product, really. I just talk. Took my clients about concepts on those alternative investments and then have a teams around me that just like your team. Great team to have with cost irrigation. My clients love it. So I just connect those pieces to my clients because end of the day I want to be more of a consultant to them. Yeah, and that's their product to them.

Heidi Henderson: [00:16:39] So how are you working with some CPAs where you're able to kind of come in and assist them with bringing this service to their clients?

Jeffrey Junek: [00:16:46] Yeah, I do. So I have several CPAs who refer clients for the alternative investment side, but more for the documentation side. They know that this clients have three kids and they're old enough to work for the company doing jobs that we don't think we be. Like I tell clients, if you have a two month old Heidi, when your daughter was two months old when she worked for you.

Heidi Henderson: [00:17:09] Nope.

Jeffrey Junek: [00:17:10] No way. You would say no, but she could. If you have a website and you have about me page on there, I'm going to hire that child as a corporate model for your company. That's great. But there's rules behind it now. You know, how much is ordinary income? Because if I go to McAllen, Texas, I can pay that corporate model $3,000. But if I go to New York City, there's different rates. So the job and location have to be suitable for that child's age and what their job is. And then I say, well, if your child's working for you, we have to make sure there's a way, agreement, contract, because every single employee you have already has a contract. So let's put a contract together for your child too. And then I make sure on that other side is the money goes to a custodial account because you can't put $1 in your left pocket and put in your right pocket your tax evasion. So the child has to have a custodial account. That money goes to the custodial account and the CPA. That's all great. But then the waitress says, What can the client says, What can I use this money for whatever the child's best interest is.

Jeffrey Junek: [00:18:10] So with my son works for me and his money goes toward baseball, his baseball lessons, his summer travel ball. So it's child's best interest and he pays for himself in that way there. Now, as a two year old, what could you do with that money? You could you could put it into a Roth IRA, Right. Which is a great college investment. They can buy life insurance, certain types of insurance that you can use later on for college education or worse, car bargains, etc., or they can use it for their daycare or private schools. So and clients realize that because they're going to spend money on that child anyways. Yeah. So that's that's about the perfect expense to say, well, I'm spending this much in child care. Okay, we can do it in Kansas and I'm going to buy my son a six, his six year old son a car. Can I make that a tax deduction? No. If I hire a son and we can pay him a certain amount of money now, we can deduct he can use that money to buy his own car. Now it's a deduction for you.

Heidi Henderson: [00:19:04] Mm hmm. Interesting. Okay. And so you talked a little bit about documentation. So that's part of what you're bringing in is that you got interactive.

Jeffrey Junek: [00:19:12] Media and that's why the CPAs love what I do, because they know that a child employee can hire his child. But it's the documentation behind it. You know, when I talk about Section 280 of the tax code, that's the the section where a a taxpayer has their primary residence up to 14 times a year and not have to pay one dime of rent on it, meaning taxes on it. How does that work for a business owner? So they know that there's a tax code there. But what I do is when you go home, let's say that my wife's part, my business, if they're a physician and the wife works in the office, they have business meetings every night. Mm hmm. So what I do is we can rent your house out not for 14 times a year, because I think that's over That time, I just do ten meetings a year. Then we use other teams for vacations. Mm hmm. But corporate retreats. But we rent those houses out for those meetings, which is great. But there's documentation behind it. Mm hmm. I do a rental agreement, So there's a rental agreement from the homeowner to the business. Very important to have. And then I do a quote. I go on line and get a quote. How much is it? How much is a conference room to rent for 4 hours because hotels do not rent it for a dollar? I mean, for hourly.

Jeffrey Junek: [00:20:23] Yeah. If you call a hotel that rents the hourly rate, don't go to the hotel. It's not good at all. Right. Yeah. Well, yeah, just advice. But so we get a for our club for a hotel that has 4 to 6 people wi fi, Internet access, refreshments, flat screen TV. What did I describe your living room? We're talking like business with your wife already or your are your your partner or your father. So we do that, and then I do the quote for them, and then I do the corporate meeting minutes. So now they're actually compliance with their corporation because you'll find out in most cases that the law says if you're an S Corp is you're required to have a corporate meeting one time of year. Mm hmm. And when I first talked to 90% of my clients, they never had a corporate meeting ever. They go to their attorney or CPA. They get their corp. S corp now. Woo hoo! And they get that little binder, the corporation notes, and it sits on the counter and gets collects dust on a bookshelf, and that's it. And if they ever got sued, the first thing a defense attorney is going to ask you is see your corporate records.

Jeffrey Junek: [00:21:27] And they're looking for those corporate meetings, and then they're gonna ask you for your financials and what are they doing? They're looking to see if you're co-mingling money and you haven't had a corporate meeting. And what they're going to ask the judge to do is or break your corporate veil because you're not acting as a corporation as you should. And it happens every day. So by having these corporate meetings that you already have, you are talking business at home. I wasn't documented behind it and put everything together for you. Now you get the tax deduction and now but more importantly, you're in compliance of what you're supposed to be doing with the S Corp already. And that's why the CPA really love what I do, because the CPAs, they all know these deductions you can do. But again, it's the documentation behind it. I tell people there's three rules of the IRS. Is it ordinary necessary? Is it documented? Right. And is it in the code? And if you follow those three rules, you're good because there is no gray area in the tax code. It's either black or white. Mm hmm. Are you following code?

Heidi Henderson: [00:22:24] Interesting. Well, I mean, it makes a lot of sense because with the CPA industry right now, I mean, that the biggest issue I keep saying this over and over is it's totally a staffing issue. And so, so many of our clients, taxpayer clients are looking for advice. They're looking for consulting. They want assistance, but their CPA just don't have the time to sit down and have these conversations. And they certainly don't have the time to work on the documentation for that type of stuff like what you're describing.

Jeffrey Junek: [00:22:52] It's true. And it's not their job. They hired your CPA. Their job is to file their taxes with all the information they gave them. And my client said, look, this is not your CPA fault that they're not doing this. It's not their job. So the life of a CPA is crazy from January until March 15th to April 15th. They're not doing tax returns. You're doing extensions? Mm hmm. And then from April to August, they're firing their Medicare. If they're a physician, if they're in Texas, they change the Texas franchise tax, then they're going to work on extensions into October. So they have a now from October 15th until December, they got to take some time off because they've been working long hours. And so they really have 2 to 3 weeks to meet with. Average CPA has 250 clients. There is no way and it's not their job. And that's why CPAs love what I'm doing is because I'm filling that gap and helping their clients out and added value service to the CPAs. What I'm doing for their nice.

Heidi Henderson: [00:23:49] Yeah, I could see that with the documentation. You know, one area that I was kind of interested in talking with you about diving into a little bit is in regards to conservation easements. And this is in no way I'll preface this or to promoting conservation easements. But I think it's interesting to first off, just to understand high level what is a conservation easement because there's still some groups that really don't understand it. Right. And then after we kind of define that, then let's let's walk down that road a little bit and talk about where things are at with that right now.

Jeffrey Junek: [00:24:18] Yeah. So an easement is actually just a deed that's not a piece of property that says you can never, ever develop that property in perpetuity of the land. So for the life of the land, it can never be developed. But back in the seventies, Congress put a provision in the. Koda says if a land owner or land owners place a conservation easement deed on a piece of property, they get the difference between what the value of the land is that day compared to its highest economic value. So let's say and I break it down, very simple. If in Florida, an average lot cost $50,000 to build a house on an average lot and now we're going to build a house in that line. So if you buy the lot and you build a house on it, it's easily worth $300,000 to sell just a basic house in Florida. So let's say you have that lot and you're never going to build on it. So it's 50,000 minus the the House values 300,000. That owner would get a 250,000 deduction by never building on the lot. And why do the governments put that incentive back in there? Because if you remember back in the seventies and eighties, our country is growing, but we're really cutting into our wetlands, our farm lands in our scenic areas. So the government just couldn't keep buying with the budgets back then laying up to conserve. So they said, you know, let's incentivize the private landowners to do this, to conserve the land because we don't have the budget to buy the property and then manage that property on that side. So it's just a desperate piece of property and we've seen it. If you have a lot of cities up the reservation says there's houses behind their houses, easements can never be developed and those are easements because you give the owner the excuse me, the property developer got tax breaks for doing that.

Heidi Henderson: [00:26:04] Yeah, well, we've seen that in residential developments where there's areas where they require a certain amount of open space so that they're maintaining that kind of open space feel, especially in Utah and lot mountain and resort communities. They've done a really good job with that. But another conservation easement, I think, you know, everybody knows the Central Park you know, Central Park in New York is larger is probably the largest conservation easement in.

Jeffrey Junek: [00:26:28] Metropolitan area, correct? Yeah.

Heidi Henderson: [00:26:29] Which has made sure that we have retained and kept land like that for public use that is kept natural. And we have the ability to, you know, so every single ounce of land doesn't get developed into a skyscraper. So so there certainly is a place for it. Now, it kind of comes into play how it has been used from a syndication type sense, where we've seen some investors investing into conservation easements for the sake of the tax benefits associated with that.

Jeffrey Junek: [00:26:58] Yeah. So back 15 years ago, certain groups of promoters said, hey, look, you know, because the average person who's making $500 million can't just go out and buy land every single year to get this great tax incentive, but not just a tax incentive, you're really conserving for the environment, which is a huge, huge thing, too. And so they said, you know what? Let's put a group of investors together to buy a large piece of property. Let's conserve. That piece of property is never develop it. And then they're going into to tax break. So they've been doing this for over 15 years and we really never had a problem until it got really popular. And anything that gets popular, there's always bad players that come into the game and the bad players take advantage of the situation, the highest and best use of the land. And that's where the valuations come into play with the IRS is not very happy about. Mm hmm. And explain why. Yeah.

Heidi Henderson: [00:27:52] Yeah. So dive into thought a little bit about, you know, I think it'd be helpful for our listeners to explain a little bit about how the how the calculation kind of works in terms of why someone would go into, like, a syndicated type conservation easement deal.

Jeffrey Junek: [00:28:04] Perfect. Yeah. So why would you do it? You know, first of all, so, you know, we buy land is a valuation for the highest and best use. So if you invest in a piece of property, let's say it's worth $100,000. But we know if we build that piece of property and build it out, we get a $450,000 deduction on it. So now that client gets for every dollar he invests, he's going to get a charitable contribution on that investment. So for every dollar you invest, he gets a $4.50 charitable contribution as tax return. It's matching like given to the Red Cross, but it's a super I thought it's a tax deduction put on steroids. Mm hmm. And so that's where people took advantage of it, because you see deductions 8 to 1, 9 to 1, this one over evaluated. Mm hmm. Tax deductions on it. But it's a great tax incentive if it's done right and tax planning done right for the client. But it has to be done right with the right sponsorships and programs out there because it will be challenged by the IRS.

Heidi Henderson: [00:29:08] Yeah. Yeah. So it does require it's a listed transaction. So conservation easements require certain forms that are then filed reporting that you have made an investment into a partnership that's listed transaction. So from there, we've certainly seen a lot of legislative discussion about conservation, easement and changes in tax law, wanting to, first up, retroactively take these away or hamper the potential benefit. So, you know, it's. I think the conversation is timely because there was actually a change just recently passed, I think, in Biden's bill that was passed in December. Dive into that a little bit about where where we're at now.

Jeffrey Junek: [00:29:46] I'm going to start from the beginning from tax law towards that now. So there's no issues about that. But in 2016, they made this a licit transaction and when they made a list of transactions, they said and first of all, the CPAs were wondering, why is this illicit transaction? Because it's the most reportable item on your tax return already is because it's a non cash contribution over $500. So we have to put appraisal to it. Everything else is. So the IRS already knew you're doing it. So they made a list of transaction to really find out who the sponsors were and how much the sponsors were being paid for it and the commissions on etc. because there's some bad players. 2017 this bill that you mentioned was try to be put in the Fair Act of Conservation easement bill and it never got any gains because who invests in this? The senators do. I mean, there's lots of senators that do this investment and so it just never gained anywhere. But in 2020, they try to pass it again and made it retroactive for 2021. It went nowhere because you can't make a tax law and say, oh, by the way, if you invested this in 2016, since it was become a listed transaction, we're going to go back and make this a new law. And the new law says if you invest in a conservation easement, you get a it's a 2.5 deduction. So for every dollar you invest, you get $2.50 deduction. And where did that $2.50 dollar come for deduction come from? Because, again, this bill is trying to pass during the Obama administration. So during the Obama administration, the highest tax rate was 39.6. So if you look at $2.50, it maxes out that 39.6. So for every dollar you invest, you get a dollar deduction. So there was no tax benefit. They just kept it there. Now, it did just get passed. So some other things. So and just this last year, the sixth Circuit Court ruled that this is an illicit transaction.

Heidi Henderson: [00:31:36] Okay.

Jeffrey Junek: [00:31:37] So it depends. If you live in a sixth Circuit area, they say it's not this transaction the iris did not like. That was a huge loss for the IRS. And the reason why they ruled is because the iris did not follow the proper procedures to make illicit transaction. They just overnight said in 2016 it was an end of December. By the way, this is illicit transaction now. There was no hearing on it. Nothing. They just made illicit a transaction. So if I went to the sixth Circuit Court, they ruled it. 11th Circuit Court is hearing it. They're going to do the same thing with it and say it's not illicit transaction. So now that comes a new bill. So finally, with this new Biden bill that's over 4000 pages, 99% of it's not even related to our budget. They earmark this into the bill. And the bill now is not retroactive, which is a good thing. And there's a new language in it, too. It says that there are 2.5 deduction or if you wait three years, you get the full deduction. So if you wait three years, you end up $4.50 a deduction or whatever program you're in, a $4 deduction, etc..

Heidi Henderson: [00:32:43] So waiting three years, so you buy the property, essentially you sit on the property for a minimum of three years. And then at that point, if you want to roll this into a conservation easement, take the charitable deduction. Yes, you can do it, but it needs to be three years after.

Jeffrey Junek: [00:32:56] Your whole period for the full deduction. Correct. But there's some language that needs to be cleared up with that, too. Is it three tax periods or is it calendar years? Because if it's calendar years, it's really a two year taxpayer holding. So we're waiting for the clarification from the secretary, who has 120 days to really clarify that. Now, there's another caveat to that, too, that says but there's another exception is if you do a historical easement, not a conservation easement. And a historical easement is conserving a historical building, you do not have to wait the three year whole period.

Heidi Henderson: [00:33:27] Oh, okay.

Jeffrey Junek: [00:33:28] So it's a it's a great thing. And there are historical easement syndications out there. And you'll see those more in downtown areas and why they're in downtown areas, because you're conserving, let's say, a ten story building. But if you tear down that building in the downtown area, I could go 30 stories. So now you get the tax difference, the highest and best use of that ten floor all the way up to the 32 floor. It's just a great tax incentive there. But again, that comes down to valuation. And that's where the IRS is really hammering the valuation. But the problem with it is they've lost majority of the cases. And it's interesting because they lost it because a majority of these projects are really good investments out there. And it's conservative land. But again, there's bad players. And the biggest court case they lost this recently was a Champions golf course. And they the judge said, hey, look, Iris, you're wrong. The Champions Golf course was a they're asking $10.9 million deduction. The investors only put $2.9 million in. So they got 7 to 1 deduction. What the IRS said is worth $0 at first.

Jeffrey Junek: [00:34:35] And they won at the lower courts. The lower courts, the average judges doesn't know how to handle this and all these appeals. So the Champions Golf course appealed. It went to the upper court and the judge said, hey, you're wrong. The way you're appraising this is wrong. The valuation that it is correct, but it's not 10.9. We're going to go down to 7.9. And the reason why the judge went to 7.9 was because they the appraiser said, we're going to be able to sell this property and two and a half years compared to five years. Well, it's not about the valuation. It was just saying, hey, look, you did the most marketing as a haircut. If it's a great win for the investors and a good win for the syndication. Yeah. But there's so much unclarity right now. The law with the secretaries and say for the listed transaction because the law says it's going to be listed transaction again. But we're really waiting for the secretary to say how it's going to be written and what the recording of it is going to have to be.

Heidi Henderson: [00:35:32] Yeah. Well, you know, it's interesting. I mean, we've had clients who have invested in easements. I'm familiar with them. I've worked with a number of groups that specialize in that structure. I know you have as well. But it's been interesting to follow how that's been transitioned. A lot of CPAs historically don't typically like to play in that space. You know, get a little bit afraid of the listed transaction scenario. I've seen many of these who have gone into review, but the partnership gets audited, not the individual investor.

Jeffrey Junek: [00:35:58] Typically as the rules only, you know, as that individual will get audited, only the partnership can be audited and the good projects out there have a reserve.

Heidi Henderson: [00:36:07] Yeah, there's a reserve for the legal fees and for audit. And then, you know, the other the other point I think that's worth making is there are certainly, you know, as with all things I honestly. Looking at what makes sense, looking at common sense, what is reasonable, and then making sure the documentation is appropriate. And I think obviously that rings true with conservation easements. If it's too good to be true, it likely is. But if we really look at what makes sense and in that sense, you know, I have looked at some of these projects that are dealing with with legitimate mines or oil and gas were legitimately pumping drilling and made fracturing oil and gas, but they conserve certain property around it in lieu of pumping so that they're preserving something that might otherwise damage wildlife in the area or something that legitimately has a purpose behind it. I think some of those have a very strong standing and can make a lot of sense. But yeah, it's interesting to see how the IRS has handled these over the last few years.

Jeffrey Junek: [00:37:09] And I tell my clients if this is a high risk investment because it really is an investment and it has a tax benefit, but if it's done with the right company and the Audit Reserve is taking some risk out with it because the IRS is going to challenge every single one. But you personally don't get audited. The partnership does. But I tell my clients is, look, if I can if you're going to say if you invest $100,000 in your neck and your net savings is 75,000, so you total saved 175,000, you take that 75,000 because you're going to spend it anyway on taxes, put it away in a good short term investment. So if something does bad happen, hypothetically, you already made that money to pay up already and go from there. Just don't go spend that money. Go go buy a new car or take the family to Hawaii three times a year. It just doesn't make sense.

Heidi Henderson: [00:37:58] Yeah. Yeah, that makes sense. So what other kind of alternative strategies have you worked specifically with or you feel like are good options?

Jeffrey Junek: [00:38:06] So, you know, several options. We we look at natural gas is a great alternative investment for there are some clients out there just don't like the easements but they want a tax deduction to help them save money. Natural gas is a great investment and the reason why is first of all, you get a deduction for off the bat. So for every dollar you invest, you get about an $0.85 dollar deduction, which is great. So it's not just a deduction, but it's a great investment. And there's lots of natural gas companies out there. So there's three or four I look at with my clients, make sure the ones I like pay off usually within a year. And with natural gas being where it's at right now with Ukraine and Europe and natural gas shortages, my clients are getting the full return that they invested a hundred thousand within 13 months. They've got their money back and they're getting these huge monthly checks. Wow. Natural gas. Because what happens in natural gas, they say it takes about between $3.90 to $4 to make a profit and their sun for 7 to $8. Now, interest rate. Now this investment's a long term investment. So it goes for a long, long time. And that's what to my clients is not something that it's short term, 3 to 5 years. It's a long term investment on that for their tax strategies on that. Another one I do is a lot of my clients we talked about the buckets, Heidi, about the tax free bucket later on retirement. A lot of my clients will have self-directed IRAs. They're business owners. They was self-directed. Ira, how can we convert that to a Roth? Roth conversions are great, but we can convert it all to a Roth that you have to pay a taxes on that conversion.

Jeffrey Junek: [00:39:41] So there are certain investments out there that we do. They have notes there are 3 to 5 year notes that pay 8%, which is great because with the volatile market right now, I'll take 8% all day long. But what happens is, just like your self-directed every year, it has to be evaluated. So these are construction projects for building retirement homes, condos, etc. And after the first year, they get revalued. And just like with any construction project out there, it's usually about a 40% discount from the valuation. So let's say you take a hundred thousand. Now, we take the IRA money, we just transfer it over to another account. There's no new freshman in your pocket now, but at the end of the year, we're going to we're going to reevaluate and now it's worth 60,000. So now we can convert that to a Roth at a 40% discount in taxes. And they're making 8% a year. The money goes back to their IRA account. Who was managing it after that? And clients really do like that because our goal is to take a lot of their income and make it into a tax free bucket later on. And retirement in a Roth is great. I love Roth because, yes, it's tax free, but more or less there's no mandatory distribution on that. So you don't have to take money out of that when you're at a certain age. And then also you can you can pass it on to your kids tax free, too, for estate planning.

Heidi Henderson: [00:40:57] Are there are there limitations on that, voluntary limitations for how much you can convert or how much you can put in on an annual basis or limitations for like like someone in a high income bracket?

Jeffrey Junek: [00:41:07] Yeah, there's no limitations on Roth conversions. You can convert whenever you want the highest on that that side. There are limitations of that investment and it's really suitability issues. There's a client has 500,000. I will the the broker dealer is not going to take 400,000. They might take three years to take all that 500,000 to switch it to a Roth. But a low percentage is all about suitability on that side, but it's still 8% return and it's 40% discount.

Heidi Henderson: [00:41:35] Interesting. Yeah, so quite a few things. I think you and I had kind of mentioned opportunity zone investments as well, which can be good for some capital gains. Kind of weird. A We really thought that we might see that extended in the Biden bill or even before that.

Jeffrey Junek: [00:41:50] Wasn't we.

Heidi Henderson: [00:41:51] Haven't seen any extensions on the discount of the capital gain that's incurred upon the sale of a property or a sale of some other long term capital gain asset.

Jeffrey Junek: [00:42:00] Now, it's going to be a separate bill, by the way, in February, it looks like to be a separate bill to extend the discount, but opportunity zones are great. All it is now is a tax deferral, Right, Because there's no discount on it. But with opportunity zones, I'm always wary of who they are and what the investment is, because a lot of them are just like. So it's an opportunity zone. Back during Trump's administration, they were trying to make certain areas that could be developed, low income areas that could be developed and bring investors to those areas. So they put a Trump, as Trump's administration says, make it an opportunity zone where we can take a sell a business or capital gains any capital gains. But it doesn't have to be 100% like at 1031. So if you have let's say you have $1,000,000 in capital gains, but you can only want to do $200,000 in upper you zone, you can do that. So what you do is you deferred your capital gains for five years. So in fact, you defer your capital gains in five years. And if you hold that investment after ten years, it's all your investments tax free. And it was great, but people were just going to middle of the projects. One of the projects saying, Look, we're going to rebuild this corner store here and make it a beauty salon.

Jeffrey Junek: [00:43:11] Well, it's really not a good investment. You know, you can put lipstick on a pig and it's still a pig. I hate to say it. So but the projects we look at, I really have to be when I look at it as well, it has to be a true investment purpose, first of all, because it is an investment and it has to make sense. The ones I like to see with my clients do is they get 80 to 100% of money back in year four. Mm hmm. And why is that important? Now they can pay those taxes. That's tax postpone in year five and in ten years. What's the return going to be? So usually the average between two and one half to three, three, three times a return, $2,000 in, you get 300,000 tax return. Ten years on that. Now the tax free. Yep. Tax free? Yeah. Tax free. And the for it's not taxable income to you because you're returning your principal. Right. That's not a taxable event for you. So you have money to pay your taxes for yourself. And the one I'm looking at right now is in Tampa, right on the waterway. We're building a 32 story hotel. It's amazing opportunity zone for the clients in that business and start paying dividends. And you're in your five two.

Heidi Henderson: [00:44:18] Very nice. Yeah, I agree. You know, this this is one that when it first came out, I think that the original thought was this was huge. This was a massive opportunity. We saw a lot of investors, developers and sponsors go out and start to buy up land and plan to these huge opportunity zone projects. But it was a situation where, you know, to your point, we we don't want the tail to wag the dog. So we have to be aware that we're not making choices because of the tax implications that ultimately we're looking at making wise financial investments. So to your point, having these deals properly vetted, having someone who understands how to vet those projects and make sure the project is legitimate, that the sponsors are legitimate and understanding the ins and outs of how that projects works. From your original investment through that long term hold period, they are tremendous. It was interesting too, because I don't think there was near the amount of long term capital available as was expected when this bill passed, because again, to qualify for the investment, you have to go in with capital gains funds, Correct. You can't just decide, hey, this looks like a good investment. I'm just going to go. I've got some cash sitting at account. I'm just going to go buy into this deal. It's really fascinating because you could only buy into the deal with capital gains money.

Jeffrey Junek: [00:45:37] Well, they were not the client, the ones I recommend. You can actually. You don't have to have capital gains. You can invest into it because it's actually a real investment. Oh, nice. That's great, because three times X return is not bad. If I get my principal back in four years and I'm going to get 3xx for ten years, it's a great investment. Now, I might have to pay taxes on that ten years because I didn't. I don't have any capital gains to write off that side of it. But still a good investment.

Heidi Henderson: [00:46:00] Yeah, Perfect. Yeah. Yeah, that's right.

Jeffrey Junek: [00:46:04] The worst advice is to buy something for tax benefits. Yeah.

Heidi Henderson: [00:46:07] Exactly. Well, I always got away that we see that We see that a lot with depreciation too, with bonus depreciation and looking across segregation, people making decisions because of the first year immediate benefit of the deduction, which is difficult to pass up. I mean, it is absolutely created a windfall of tax savings, but still always important to look at the benefit of the overall investment.

Jeffrey Junek: [00:46:27] You really need a new truck or a tax deduction.

Heidi Henderson: [00:46:29] I think that's right. That's right. Yep.

Jeffrey Junek: [00:46:32] Yes. Opportunities are great.

Heidi Henderson: [00:46:34] Yeah, yeah, yeah. Perfect. Well, Jeff, this has been wonderful. It's so cool to kind of just banter back and forth on some of these things. I think some of these strategies, things that people are not always aware of or really familiar with. And sometimes it's just nice to know enough to be dangerous and just have a few key points so that we can generally identify if something's worth looking into and also have a resource for someone who is familiar and understands the due diligence process, how to understand a good from bad potential investment. And you've again been a great resource and a great partner to work with over the last, you know, ten some odd years. And I.

Jeffrey Junek: [00:47:10] Think what you're seeing.

Heidi Henderson: [00:47:11] Here is a great value add service.

Jeffrey Junek: [00:47:13] Thank you so much. I appreciate your time. Sorry, my dogs barking here in the background.

Heidi Henderson: [00:47:16] And no problem. We love dogs.

Jeffrey Junek: [00:47:20] Much. I appreciate the time. Okay.

Heidi Henderson: [00:47:22] All right, Jeff, thank you so much. Thanks for being a guest. And we'll talk to you soon.

Jeffrey Junek: [00:47:25] Rabbi, I think you.

Creators and Guests

Heidi Henderson
Heidi Henderson
I am a Tax Consultant and Real Estate Investor, and podcast host of Healthy, Wealthy & Wise. I advise clients on the application of Tax Efficiencies relating to their investments both directly and indirectly. My education is in Accounting but my entrepreneurial spirit has led me through many business ventures. But I love finding money for people who didn't know it was there! Cost Segregation, 179D deduction, 45L credits, R&D tax credits, Historical Tax Credits, Conservation Easements, Opportunity Zones, Alternative Investments, and Captive Insurance are a few tools we can help you with. As the Executive Vice President and Board Member of Engineered Tax Services I help plan for growth and operational improvements internally, while working externally with investment minded individuals to optimize their investment. I also teach over 30+ Continuing Education courses annually to CPA's, Design Build Professionals and Real Estate Professionals across the U.S. If synergies are apparent, please send me a connection request and let's see how we can work together.
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