September 15, 2025 • 46 mins
In this third part of our tax strategy series, Cody Daniels returns to wrap up the final chapters of his ebook “Laying the Foundation: A Contractor’s Guide to Strategic Tax Savings.” Learn how to avoid costly surprises, maximize deductions, and build a long-term plan that protects both the business and the family. Get practical tips and professional insights that can help you ensure tax efficiency and maximize your business profitability. Close out the year strong with tax strategies every contractor should act on before year end.
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Episode Transcript
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Speaker 1 (00:04):
All right, I want to go ahead and welcome everybody
to the Lumberyard Podcast once again. I am excited to
have Cody Daniels, founder of Builders Tax Group, with us
once again. And this is going to be part three
and we're going to keep continuing on for our series
that we're doing. Really talking about the Book of a
(00:30):
Contractor's Guide to Strategic Tax Savings again. This is his
ebook detailing ten strategies to minimize taxes for contractors and
that is available for free download. Before we get started
into the episode, I want to just again give a
introduction of him. So, Cody Daniels, CPA with over a
(00:53):
decade of experience. He led the construction and real estate
tax team for a top one hundred and fifty CPA firm. Again.
He founded the Builders Tax Group in twenty twenty four,
specializing in tax strategies for construction service trade businesses. And
his true mission is just to help contractors run more
(01:16):
profitable businesses through strategic tax planning, outsourced accounting and fractional
CFO services. So Cody, welcome to the show once again.
Speaker 2 (01:27):
Jennifer, thanks for having me back, and thank you for
the great intro there. The first two conversations we had
were fantastic, and I know we're set to have another
great conversation today.
Speaker 1 (01:38):
Absolutely. So Tommy, what do you have in store for
us today? What is the outline?
Speaker 2 (01:44):
Yeah, so we're going to wrap up the final four
chapters in the ebook here. So our first strategy today
is just confirming that losses and deductions are not going
to be limited for tax purposes. The second will be, uh,
you know, just focusing on state and local taxes as
(02:04):
a meaningful part of your tax liability. Obviously, federal taxes
get the bulk of the focus, but state and local
taxes can have a real meaningful impact on your tax
liability as well. And then we'll round things out with
a state and gift planning, which I think is a
frequently overlooked part of tax planning for most small business owners.
(02:27):
And then the last chapter in the book is more
of a mindset type chapter. It's not the you know,
kind of hard strategy like the other chapters, but it's
just you know, preparing for upcoming.
Speaker 3 (02:39):
Tax law changes.
Speaker 2 (02:40):
We recently had the one Big Beautiful Bill Act that
was passed at the beginning of July, and so just
you know, helping contractors, small business owners sort of like
adopt a mindset around you know, just staying up to
date and you know, being aware of the evolution of
tax law and things that impact their business. Obviously not
(03:02):
expecting anybody to become an expert in these things, but
you know, just taking a proactive approach to you know,
running your business and being aware of opportunities that exists
for you out there.
Speaker 1 (03:14):
So basically, you're telling us four strategic moves contractors should
make before year end to avoid surprises and keep more
money in their pockets.
Speaker 2 (03:25):
Always before your end, we can we can do a
lot of good for you if you get a hold
of us early after the end of the year, we're
pretty limited. There's still a few levers that we can pull.
But always, you know, preach a proactive approach to tax
planning and just overall, you know, operations of your business all.
Speaker 1 (03:44):
Right, perfect, Well, let's just jump into strategy one. So
that's going to be confirming losses and deductions are not limited.
Can you dive more into this for us?
Speaker 2 (03:55):
Yeah, So I think you know, there's a bit of
a misconception around tax planning that we're always trying to
drive our taxable income to the lowest amount possible, and
that's not always the case. You know, there's going to
be instances where, you know, we may want to show
some taxable income because we have expiring credits or expiring
(04:18):
net operating loss deductions, things like that. But in instances
where we are able to generate losses for tax purposes,
we want to be aware of whether or not we're
going to actually receive those benefits in the current year,
because there are numerous provisions within the tax law that
prevent the utilization of losses in the current year and
(04:40):
cause those losses to be suspended and carry forward to
future tax years.
Speaker 1 (04:47):
Sorry you trying to This is talk more about like
the loss limitation funnel.
Speaker 2 (04:53):
Yeah, So I like to visualize this as a funnel.
There's sort of a series of provisions within the tax
law that can and cause losses to get hung up,
so to speak, and you really have to work your
way through the entirety of the funnel to confirm that
you're going to get a partial or full benefit of
the losses. So at the top of the funnel we
(05:13):
have basis limitations. And I don't want to get too
into the weeds on this because how basis is determined
varies by entity type, so there's a little bit of
wants in there. If you're a partnership versus a s
corporation versus a sole proprietorship, there may be different ways
that you calculate your basis there. But effectively, what the
(05:35):
basis limitations say is that you can't deduct losses beyond
your investment into your business, so that would include your
contributions into the business, cumulative retained profits in the business,
and then certain business debts can increase your basis as well,
So that's sort of level one of the funnel. Moving
(05:59):
below that we have at risk limitations, and really the
difference there is that certain debts are not going to
provide you with at risk basis so to speak. So
again it's just a little bit of a nuance there
where we're going to exclude certain liabilities from that calculation.
So assuming that you know you have sufficient basis and
(06:22):
you're at risk for your investment in the business, we're
going to move down to the next step, which is
passive activity losses. So for most entrepreneurs, you know their
core business, they're going to be considered non passive or
active in that business. But for other you know, maybe
like side businesses for a table, maybe you have an
(06:43):
investment in like a rental, real estate or something like
that on the side, or even I guess you know,
other operating businesses. Maybe you're a minority investor in a
restaurant or a bar or something like that. That activity
may be considered passive, so you may not be able
to use those losses against your non passive business income.
(07:05):
So your rental loss may not be available to offset
the income that you're generating through your construction business. Okay,
going a step further, we have this concept of excess
business loss limitation. This is still in effect and actually
was made permanent by the One Big Beautiful Bill Act.
(07:26):
This came about during the first Trump presidency as part
of the Tax Cuts and Jobs Act. Effectively, here there's
a calculation. We're not again we don't need to get
into the leeds on how it's calculated, but you can
only use up to a certain amount of losses from
your businesses to offset other sources of income. So like
(07:47):
wages for example, So if you know you have a
spouse that's earning wages from a job, and you're the
business owner, your losses from that business may not be
able to fully offset your spouse's waging income. Okay, okay,
And then I would say kind of the bottom of
the funnel if you're able to get through all of
(08:08):
those steps and you're still able to deduct your losses.
For lack of a better term, there's a limitation for
net operating losses. Again, this was put into place during
the first Trump administration with the Tax Does and Jobs Act.
Net operating losses can only offset up to eighty percent
of your taxable income. So even if you do generate
(08:30):
a loss from your business in a year, and there's
a lot of ways you can generate losses, right, it
could be accelerate and appreciation. It could be like we
discussed I think back in episode one, using certain deferral
methods available to contractors. If you're using the complete a
contract method, you may be cash flowing because you're receiving cash,
but if you haven't finished the job, you're deferring the
(08:53):
gross profit recognition on that job for tax purposes to
a future tax. Here you might still be experiencing a law.
So there's a lot of ways you can create losses
for tax purposes. All that's to say, next year, when
you go to deduct that net operating loss, you can
only deduct it up to twenty percent of your in
or up to eighty percent of your taxabil income. So
(09:14):
you're still stuck paying taxes on twenty percent of your income.
So again, very nuanced, you know, part of tax law.
But I think it's just important for business owners to
recognize that just because you've generated a loss doesn't mean
you're going to get the full benefit of that loss
in this tax year. And you know, it's worth a
conversation to you know, see how you should maybe plan
(09:39):
around that. So I think one good example of that is,
you know, if my clients, really every year we have
conversation towards the end of the year, they go out
and invest in fixed assets for the business. Everybody knows
that investing in fixed assets is going to trigger accelerated
tax appreciation. We have one hundred percent POE now thanks
(10:00):
to the One Big Beautiful Bill Act. So if they
go out and most construction vehicles are going to qualify
for full write off really all construction equipment and machinery
things like that, So I think you need to look
at well, okay, yeah, if I if I generate a
loss through this accelerated depreciation, am I going to get
(10:21):
the benefit of it? And if you're not, you know,
maybe maybe you think about postponing those purchases to the
next tax here. So I think you know, understanding whether
or not you're going to get these benefits can help
you make decisions around, you know, non tax parts of
your business again, whether you should buy equipment, whether you
should have like a cost aggregation study done on your
(10:43):
real estate. If you're not going to get the benefits
of a cost aggregation study, why incur those costs that
have that study done?
Speaker 3 (10:50):
Correct?
Speaker 1 (10:51):
So at the end of the day, I mean really
emphasizing you need to be able, you need to get
with a text professional before again before year end, to
see if those losses are actually going to benefit you. Absolutely, Okay, beautiful.
Anything else you want to say on that strategy before
(11:11):
going to the next one.
Speaker 2 (11:15):
No, I mean, I think again you've hit the nail
on the head getting with your tax pro before year end.
I think I guess maybe the one thing I would
add is, you know this this particular strategy really ties
into a lot of the things that we've discussed previously.
Speaker 3 (11:29):
Like it ties into enity structure.
Speaker 2 (11:31):
Like I said, if you're an S corporation versus a partnership,
the way you calculate these limitations is going to be different.
You know, it ties into decisions around bonus appreciation. Your
method of accounting is going to have a big impact
on you know, how you're able to generate losses for
tax purposes. So it's really kind of a culmination or
I guess the result of the other strategies that.
Speaker 3 (11:55):
We've considered implementing throughout this series.
Speaker 1 (11:58):
Okay, perfect, Well let's go ahead and go to the
second strategy. Don't forget about your state and local taxes,
so dive right in.
Speaker 2 (12:10):
Yeah, so a couple of things here. I mean, we
have the multi state component of this, where if you're
a contractor going over state lines, there's issues that go
along with that. But I think you know, if you're
a contractor that's operating within your home state and you
never leave the state, there's issues that you need to
be aware of there as well. So I think i'll
(12:32):
start with, you know, kind of the multi state experience
and some of the challenges that can come.
Speaker 3 (12:37):
Along with that.
Speaker 2 (12:39):
If you're a contractor that crosses the border into another state.
There's obviously the income tax implication of that, but there's
a whole other suite of tax issues that they could
impact your business. You have potentially sales and use tax
issues depending on the frequency, and you know, just sort
(12:59):
of your deployment base, you could have payroll tax issues.
So it's not just the income tax implications of that.
And I would say that it's as a construction business,
it's really hard to stay off of state Department of
Revenues radar when you move into a new state and
(13:20):
start doing jobs up there. Number one, I mean you're
likely pulling permits and so that in and of itself
is typically going to require some form of registration with
the state or municipality, county, whatever it may be in
that new state. So that alone is going to put
you on their radar. But I've heard stories even beyond
(13:43):
something like that where auditors for state Departments of Revenue
they may be driving to the office, or they may
be out to lunch and they drive past the job
site and they see on the truck or the van,
you know, big decal ABC construction. Right, they can go
into the office and they can drop your name in
(14:04):
their database and determine if you've been filing with them.
And I've heard that it's not out of question for
an auditor to open up an audit on a contractor
simply because they saw them doing work in the state
and they got their name, you know, plastered in big
text on the side of their vehicle. So yeah, this
(14:24):
is an industry where it's really hard to avoid getting
caught at some point in time if you're crossing state lines.
And the big downside to this is there's no statute
of limitations if you're not filing. So typically for tax
purposes you file your return, either the IRS or the
(14:46):
state Department of Revenue has three years from the filing
of that return to go back and audit it and
you propose adjustments, et cetera. If you've been doing work
in a state for a number of years and you
haven't been filing, there is no statute of limitations, so
they can go back in time. I worked with I'm
located near Chicago, so a lot of my clients are
(15:08):
are Illinois based. I worked with an Illinois based contractor
that started going up into Wisconsin, you know, just over
the border, doing jobs pretty infrequently a few years back,
and they were identified by the state of Wisconsin for
a sales and use tax audit. So this is this
is not income tax, it's sales and use tax. So
(15:31):
what Wisconsin was attempting to gather from this from this
contractor was use tax on materials that were purchased in
Illinois but used that job sites in Wisconsin. And so
we had to go back and effectively self assess late
sales and use tax filings for this contractor, you know,
(15:55):
go back in the records, identify the materials purchases, and
what job sites they were used at. And I think
we ended up settling with the state to file and
pay taxes on seven years worth of activity. And really
for this contractor, at the time, this was a very
small part of their business. I think in most years
(16:17):
it was less than two percent of their annual revenue.
So we're not talking huge, huge dollars here, but still
a big, you know, time commitment really from them, more
than more than a dollars and cents commitment. There was
just a lot of time and effort that went into
this process to go back and determine the liability. And then,
(16:38):
of course, because now the state has the sales and
use tax filings on record. You know, we went back
and chose to file income tax returns for those years
as well and pay any required income tax that was
due during those tax years. Again, I think the fees
that we charge were probably more than the taxes in
most because it wasn't a big part of their business.
(17:02):
But again, it's easy for the state to identify these
opportunities and generate a little bit of revenue. And every
state is hurting for revenue right now, so states are
very aggressive on these matters.
Speaker 1 (17:14):
Now, did the contract or just not realize that they
had to do this, that they were crossing state lines
and this is a requirement.
Speaker 2 (17:21):
Yeah, I think it was just, you know, kind of
an ignorance issue, and you know, maybe a little bit
shame on us for not asking that that was something
they were doing. You know, quite frankly, a lot of
states filing determinations. It's really a cost benefit issue, and
(17:42):
you know, whether it's right or wrong, I will say
that businesses will make decisions based on the cost of
compliance versus the downside or the risk of not filing,
and so you know that's a business decision that business
owners will make. We can recommend that they file in states,
but ultimately, again, if your exposure is pretty low and
(18:03):
the cost of compliance is pretty high, you may roll
the dice and sometimes sometimes you're going to get caught.
Speaker 1 (18:11):
Yeah that's a really good, I mean, real life example
of crossing the state lines. Then what can happen not
filing properly?
Speaker 3 (18:22):
Yeah?
Speaker 2 (18:23):
Yeah, So I think maybe we could switch gears here
and say, well, what if you know, what if I'm
running a business and I don't cross ailienes? What if
I'm only operating within a singular business here? I do
think there are state and local tax issues that those business.
Speaker 3 (18:37):
Owners should be aware of as well.
Speaker 2 (18:40):
There's this concept of a pass through entity tax that's
kind of a new thing. I think a lot of
business owners have started to become aware of it over
the last two three four years. But effectively, what this
past or entity tax election is an election that's made
by either an s corporation or a partnership business to
(19:05):
pay the taxes for its owners at the business level.
And it's really designed to work around the new itemized
deduction cap for state and local taxes. So under the
Tax Cuts and Jobs Act, individuals were limited to a
ten thousand dollars deduction cap for their state income taxes,
(19:28):
their property taxes. If you're in a state that has,
like you, personal property taxes things like that, your deduction
was capped at ten thousand dollars, and it's not up
to forty thousand dollars. Under the One Big Beautiful Bill Act,
it has expanded that, but I think for a lot
of successful small business owners, even a forty thousand dollars
limit is going to prevent them from getting the full
(19:50):
deduction on their state income taxes and property taxes, and
again any other state and local taxes you might be paying,
especially if you're not high you know, high income or
high tax state doesn't have to be income tax you know,
here in Illinois we have pretty high property taxes. So
I have clients that they're total deductions between income taxes
(20:12):
property taxes, but a c forty grand So this past
thro entity tax election allows your business, again if it's
organized as an as corporation or partnership YEA, to convert
your income tax liability on your business income to a
business tax expense from a personal tax expense, so it's
(20:33):
not subject to that cap. In the One Big Beautiful
Bill Act actually preserved this. There was a part of
that bill early on that was going to, you know,
effectively make it unlawful for these states to allow this
or make it unlawful for you to convert this individual
tax liability to a business tax liability, and that was
(20:55):
not part of the final bills. So I think there's
real opportunities there to generate additional federal tax deductions really
by checking a box and cutting the check from a
different bank account. So it's not generally speaking, it's not
going to change your total state tax liability. It's just
(21:16):
converting it to a business expense. So your business is
going to cut the check rather than you cut the check.
And the benefit of it is now you're not limited
to that either ten or forty thousand dollars cap.
Speaker 1 (21:30):
Okay, And I just want to also put a plug
in that. I know I said that this is part
three the final series, but we're actually going to do
another recording in a few weeks to go over the
act that the Big Beautiful Act and dive a little
bit more into that so we could get into more
details on that.
Speaker 2 (21:50):
Definitely, that will definitely be that's on the agenda for sure.
Speaker 3 (21:54):
Good. Good.
Speaker 1 (21:55):
So then when it comes to this just again, what
should contractors do again, ask your tax professional right about
the election and what you can do to avoid these
state and local taxes.
Speaker 3 (22:09):
Yeah.
Speaker 2 (22:10):
Absolutely, you know, have the conversation. Depending on the state
that you're operating in, the election may need to be
done before the end of the tax here. So here
in Illinois, we can make the election on the tax return.
So for twenty twenty five tax here, we'll make that
election in twenty twenty six when we file the tax return.
In other states, you may have to make it before
(22:32):
the end of twenty twenty five. There may be different
cutoff dates in twenty twenty five when you need to.
Speaker 3 (22:37):
Make that election.
Speaker 2 (22:38):
So there is a potentially a time sensitivity issue here
as well that you need to be aware of in
order to get those benefits.
Speaker 1 (22:47):
Good good, Anything else that you want to address with
this strategy before going on to our next one.
Speaker 2 (22:54):
Yeah, One other sort of state tax issue that I
want to bring up is the nonconformity that most states
have with federal tax laws. A big one that I
typically see is depreciation. So, like I said, we have
one hundred percent bonus depreciation back in play. That's a
(23:14):
federal tax law. Different states may or may not conform
to the federal depreciation rules. So you may operate in
a state where they follow the federal rules, and they
may have provisions in their law that, regardless of what
changes are made at the federal level, they'll follow those.
You may be in states where they follow federal law
(23:36):
as of a specific date, so as federal law changes,
they would be operating under old law potentially, so it's
not uncommon. Again, depreciation is always a good example because
construction typically is a very capital intensive business, and business
owners are aware of the benefits they can get there.
(23:57):
But yeah, let's say you wipe out your taxable income
because you buy a bunch of vehicles or equipment before the.
Speaker 3 (24:04):
End of the year.
Speaker 2 (24:05):
That may not that depreciation expense may not be available
at the state level, so you may end up having
a significant state tax liability despite having no federal tax liability.
So it can be a surprise if you know, you're
not aware of it. And so yeah, I think that's
just one thing I want business owners to be aware
(24:27):
of is again, what your income for federal purposes and
not necessarily your income for state purposes, and there could
be very large swings there.
Speaker 3 (24:35):
I mean I had a client.
Speaker 2 (24:38):
Just back in twenty twenty four they did a cost
aggregation study on a property that they invested in, had
a loss for federal purposes, had income at the state level,
and ends up you know, paying state income taxes. So
if you're aware of it, a lot of times, I
think just being aware of these things and not being
(25:00):
caught off guard really kind of eases the pain of it.
So that's a big one. There's some others, you know,
I think, like again kind of going back to our
first strategy with like lost limitations. You know, there's different
like NL limitations that apply at the state level that
are you know, different from the federal level. So here
(25:22):
in Illinois, for CEA corporations, for example, we have a
limitation on the state net loss deduction that you can claim.
It's just capped at a flat five hundred thousand right now. Okay,
So again, for federal purposes, you may be wiping out
a good chunk of your income utilizing that operating loss carryovers.
(25:43):
But at the state level, again, you may be getting
hit with a surprise state tax liability because that limitation
is different.
Speaker 1 (25:50):
M Yeah, it's good to know these. It's definitely good
to know these. All Right, I'm ready to move on
to our strategy.
Speaker 3 (26:01):
Yeah, let's do it.
Speaker 1 (26:02):
Okay, don't sleep on a state and gift planning. Interested
to hear this one, Cody.
Speaker 3 (26:10):
Yeah.
Speaker 2 (26:11):
So, I think again, this is kind of an overlooked
area for most taxpayers. I think people think of a
state planning as for the extremely wealthy, and I think
the reason they think that is I believe the current
state exemption is thirteen point nine to nine million for
(26:32):
a single taxpayer, twenty seven point ninety eight million for
a married filing joint taxpayer. And I believe, don't quote
me on this, the One Big Beautiful Bill Act, I
believe increased that to fifteen million for single taxpayers and
thirty million for joint taxpayers. So effectively, what that means
(26:54):
is if you pass away and your net worth is
less than those amounts, you're not going to be subject
to the federal state tax. So I think a lot
of tax payers think that this is not an issue
for them necessarily. But I think that's again, I think
that's a misconception because there are state level of state
(27:17):
taxes that apply not every state has an estate tax,
and some people call this the death tax, so I
try not to. That's a little morbid. And yeah, you know,
a state tax is the more technical term. But just
if anybody out there, you know, thinks of it as
the death tax, you know, want to make sure we're
on the same page there. So so again, like you
(27:39):
could have a much lower net worth and be subject
to your state level a state tax. I think in
organ the threshold is as low as a million dollars.
Well goodness, okay, and there are many states that are
less than five million. So again, for a lot of us,
that still feels like a pretty sizable amount of net worth.
(27:59):
But if you've been running a successful construction company for
you know, twenty twenty five years, you know, you have
a residence, you may have a vucation property, the value
of your business, the value of your investments, life insurance,
all of these things factor into that calculation. Like it
would not be out of the question for even you know,
(28:21):
small construction businesses, for the owners that have a net
worth that is exceeding the state tax level in the
state that they reside in.
Speaker 1 (28:30):
What if you're located in a state, let's say with
no estate tax.
Speaker 2 (28:34):
So I think even if you're in a state with
no estate tax, it's still helpful to go through this
process because it's going to ensure that you know, you
and your heirs are achieving maximum tax savings and also
that whatever your wishes in life are adhered to in death.
(28:56):
This is not this is not a process that is
exclusive to your CPA. I mean, this is going to
be really kind of your whole financial team. You're going
to have an attorney involved in this process, your financial
planner is going to be involved in this. So it's, uh,
you know, really kind of an opportunity to get the
whole team together and uh, you know, talk about what
(29:17):
you want, you know, out of your life and out
of your business. So again, even if you're not someone
who's going to be subject to any form of a
state tax, you know, what do you want to do
with your business when you pass away? And that's going
to be that's going to be a question that's addressed
during a state planning. You know you have various assets,
(29:39):
do you start to transition those assets to family, friends,
you know, charitable organizations while you're alive, or do you
wait until you pass away and do that you know,
through inheritance. So these are all questions that can be
addressed during like an estate planning session or session more
(30:00):
likely just to ensure that again, you've built a successful
business for yourself, you've generated meaningful wealth. You want to
make sure that that is handled appropriately.
Speaker 1 (30:13):
So what can contractors do now to reduce their estate?
Speaker 2 (30:19):
Yeah, so there's there's some common strategies out there. Annual
gifting is obviously one that that's one that I get
a lot of questions on how much can I gift
to any single person in a given catch here without
triggering any sort of filing. You can gift really any
amount that you want, but you may if you exceed
(30:42):
certain thresholds, have to file a gift tax return and
so again there's a cost of compliance there and things
like that. But right now, for twenty twenty five, the
per recipient threshold is nineteen thousand dollars. So if I
wanted to gift, you know, nineteen thousand dollars to one
(31:02):
of my nieces, for example, I could do that. My
wife could also gift that same niece nineteen thousand dollars.
It's an how're up to thirty eight thousand dollars, right,
and then you know, I could look at my other
nieces and my one nephew and again I could do
nineteen thousand to each of them. So it's a per recipient,
(31:22):
per taxpayer threshold there.
Speaker 1 (31:26):
Okay, what about charitable giving? Can you do that? Yeah?
Speaker 2 (31:30):
Again, that's another common strategy, and there's a lot of
different things you can do within charitable giving. Something that
excites me that I think is overlooked is gifting of
like appreciated assets like stock to the charity. So what
this strategy does for you is it allows you to
(31:53):
avoid the capital gains tax that would be associated with
the sale of that stock. So let's say I have
stock that's appreciated in value, and I say, well, I
want to give fifty grand to, you know, whatever charity
you're invested in. I go out and I sell that
stock for fifty grand and then I kind of check
(32:14):
fifty thousand dollars cash to the charity based on whatever
my initial investment in that stock was. I'm going to
pay capital gains tax on that, and then I'm going
to turn around and get a fifty thousand dollars charitable donation.
Speaker 3 (32:27):
For the for the cash donation.
Speaker 2 (32:30):
What gifting the stock to the charity does is it
avoids the capital gain, but you still get the deduction
equal to the fair market value, so very you know,
beneficial from an income tax perspective, while also having kind
of the additional benefit of reducing assets in your in
your overall estate.
Speaker 1 (32:51):
Okay, Okay, And then I would say probably another one
establish chain trust as well.
Speaker 2 (32:57):
Yeah, and that can tie you know, into charitable giving
as well. You can set up different types of trusts
for the benefit of charities. You can set up you know,
trust to transfer assets to you know again family friends,
those those types of beneficiaries as well. And then there
are a variety of kind of special purpose trusts is
how I refer to them. So you can set up
(33:19):
trust specifically to shelter life insurance proceeds from your estate.
If you again have some pretty meaningful life insurance policies
that would pay out upon death, you can utilize a
trust there to those proceeds are excluded.
Speaker 3 (33:35):
Well.
Speaker 2 (33:35):
That I think is kind of interesting. I've seen a
few clients employ this strategy. Is it's called a qualified
personal residence trust or a KUBERT, and that allows individuals
to transfer you know, like their primary residents or their
vacation residents into a trust while retaining the right to
live in that property for a specified term. You do
(33:59):
have to pay rent, of course, so you're kind of
paying rent on your uh what's.
Speaker 3 (34:03):
No longer your house? But what what was your house?
Speaker 2 (34:06):
So you know, each of these strategies does come with
some nuance in complication, but it can all be effective
ways to remove appreciating assets from your estate.
Speaker 1 (34:18):
All right, I think that those are really good options
for reducing their state. Anything else you want to elaborate
on in this strategy before moving on to our next
one I.
Speaker 3 (34:33):
Want to give. I want to give one other example
that I just thought of this morning.
Speaker 2 (34:40):
I think a question that I am asked frequently is
I have this asset. I want to ensure that it
goes to my kids. Should I gift it to them
while I'm alive or should I wait until I pass
and then they receive it via inheritance? Right? And this
this came up for me in a a very personal way.
(35:01):
Last summer. My grandma was diagnosed with cancer and she
ultimately she ended up passing away last December. But I
remember last summer getting lunch with my parents and two
uncles and aunt, and that was something that came up
at lunch, was well, should we have, you know, should
(35:22):
we have grandma gift to the house to my dad
and my two uncles. And I jumped in and I said, no,
I don't think that makes sense because what's going to happen,
you know, if you receive it through inheritance when she
passes away, is that you'll receive a step up in
the basis of that asset to the fair market value
at the date of death. So if they hadn't done that,
(35:46):
if they had gone through with a gifting while Grandma
was alive, what would happen is my dad and my
two uncles would receive a carryover basis. So in this case,
my grandpa actually built that house. He was a union
carpenter for decades, so he built that house. His basis
was incredibly low. It's effectively just the cost of the
(36:09):
materials because he had no labor component there the land
they had acquired before the house was built. So I'm
sure I don't have hard numbers, but I'm sure the
basis was incredibly low. So if they had gifted that
house to my dad and my uncles, their basis would
be equal to what Grandpa paid to build it, and
(36:30):
then when they turn around to sell it, they're going
to have a gain on the spread there. Well, because
they received it through inheritance. When Grandma passed, they get
a step up in basis to the fair market value
at the date of death. When they turn around to
sell that, there's going to be probably no taxable gain,
maybe a small taxable gain to the extent that it
(36:51):
appreciated between the date of death and the date of sale,
which as long as you're turning around and selling the
property relatively quick, there shouldn't be much appreciation there. So
again I don't have hard numbers, but I would guess
you know, it probably saved them thirty to forty grand
in taxes. I'm making that one decision to wait until
(37:14):
Grandma passed and handle the property that.
Speaker 1 (37:17):
Way, I mean, and that just doesn't even have to
do with contractors. I mean, that's just no, that's anybody
personal exactly exactly.
Speaker 2 (37:25):
Yeah, And again, like Grandma didn't have a taxuble estate. Grandma,
Grandma didn't have a ton of assets, but you know,
just that one, you know, real real big asset that
she did have you know, just making a smart decision
around that, you know, saved several five figures of taxes
for my family.
Speaker 1 (37:45):
Yeah, no, I appreciate. And that's again in real life example,
so that we can all take away from on that
one because we're all going to experience it through through
our life sooner.
Speaker 2 (37:56):
While they say, you know, two things in life for
certain death and taxes.
Speaker 1 (37:59):
So that's it.
Speaker 3 (38:00):
Yeah, it happens to everybody.
Speaker 1 (38:03):
It does.
Speaker 3 (38:04):
It does.
Speaker 1 (38:05):
Well, let's wrap up this, uh, this last one here
with with our four strategy preparing for upcoming tax law changes.
Speaker 2 (38:17):
Yeah, so if anybody does check out the ebook, you'll
notice that this chapter is definitely different. It's more around
you know kind of mindset and providing entrepreneurs business owners
with you know, resources and things to consider as far
as just staying up to date when the when the
book came out, you know, we had no idea when
(38:39):
the next taxical was going to be passed, what was
included in it. So it was really just kind of
to encourage business owners to develop like a proactive mindset
in a mindset of you know, continual learning. Uh, you know,
let's not sit on our hands and wait for things
to come to us. You know, let's be pro active
(39:00):
business owners and work with our professionals to uh, you know,
to develop good tax strategy and to you know, just
do some very basic learning. Just listening to this podcast
is going to put you ahead of your peers. So
just just taking small steps. You know, you're in the truck,
you're driving to to a job site, throw on the
podcast for thirty minutes. You know, maybe you find one
(39:23):
takeaway and you can go talk to your professional and
that one takeaway could save you significant money in the
grand scheme of things. So so yeah, that's really what
the chapter is around, is just, yeah, just encouraging like
a mindset shift amongst business owners to make sure that
(39:44):
this is just an overall part of their business strategy
and they're not they're not leaving it to the last minute.
Speaker 3 (39:50):
Yeah.
Speaker 1 (39:51):
Absolutely, And like I said before, we're going to do
another recording that we're going to go more in detail
with the One Big Beautiful Act.
Speaker 2 (40:01):
Yeah, and maybe just to kind of preview some of
the topics and hopefully encourage some people to check out
that episode. This is just a real quick rundown of
some of the things that we're going to cover in
that upcoming episode, we're and talk about one percent bonus
appreciation being reinstated. We're going to talk about the expansion
(40:22):
of Section one seventy nine and when you might want
to use that as opposed to bonus appreciation. There are
rules around research and development expenditure expensing, which, again, as
we talked about in the previous episode, like construction is
an area where there's research and development opportunities and you know,
(40:44):
being able to identify those and potentially pursue an R
and D credit could have could have meaningful tax savings.
So we're going to talk about that, like we talked
about in episode one, specific construction tax accounting methods. There
were some changes there. There were some less favorable provisions
that were passed in that bill. So a lot of
(41:06):
beneficial things, but one not so beneficial thing is determination
of various like green initiatives.
Speaker 3 (41:12):
So we want to talk about that.
Speaker 2 (41:15):
No tax on overtime, I think is getting a lot
of headlines, and I think a lot of employers are curious,
you know, what does that mean for them from like
reporting perspectives, So we'll talk about that. We'll talk about
the extension of the Qualified Business Income Deduction that's section
one ninety ninety A. And then we'll talk about the
(41:35):
expansion of the business interest deduction limitations. So if you're
a business that has meaningful debt and you're paying significant
interest expense, there's opportunities for you to deduct more of
that potentially. So that's really just on the business tax side.
There's a whole slew of individual tax provisions as well,
you know, going back to the increased itemized deduction cap
(41:57):
for state and local taxes.
Speaker 3 (41:59):
So there's there's a lot of things we could dive
into on the individual side of things as well.
Speaker 1 (42:03):
Yeah, maybe we'll separate that out then for individuals and
then more on the business side.
Speaker 3 (42:08):
Yeah, we can do it.
Speaker 1 (42:10):
I definitely forward that recording. So, you know, just takeaways
or this, you know, talking taxes, someone can easily get overwhelmed.
So what would you say how to avoid actually being
overwhelmed when it comes to taxes.
Speaker 2 (42:26):
Yeah, I mean I think, like I said at this
top of the episode, like I don't expect any business
owner to know this themselves. Any time I'm doing kind
of a you know, networking event or you know, anything
where I'm kind of pitching my business, you know, my
My number one lead in is everybody needs a file
(42:47):
attacks return. Nobody should be filing it themselves. Everybody should
be relying on an expert to do that. So you know,
find your expert, rely on them. You don't have to
go it alone. Even if you're you know, just getting started.
You know, it's kind of a new startup business. The
investment in good financial advice is going to pay for
(43:10):
itself in the long run. So you know, this is
an area where I mean, you know, when you get started,
you got to have your attorney to help get things
set up. I mean, you really need to get your accountant,
you know, in line with you from day one so
that you can avoid mistakes. We fix a lot of
mistakes after the fact. But like I said, if we
(43:30):
can get in on the front end, we can do
a lot of good and save you a lot of money.
I think other things you know to do to just
kind of avoid feeling overwhelmed by it is listen to
a podcast like this where there's experts coming in and
you know, you know what you do well. If you're
a plumber, you know plumbing really well. You don't need
(43:52):
to know every aspect of running a plumbing business. You
can rely on experts. And it's not just for tax
and accounting advice. I mean that's everything that could be marketing,
It could be in legal, insurance, et cetera. You know,
assemble your your team and uh, you rely on them.
I think, you know, there's publications out there. You know,
(44:12):
a construction business owner, there's there's gonna be different written
publications to a podcast listener, you know, kind of a
little more old school and.
Speaker 3 (44:20):
Like to read.
Speaker 2 (44:21):
I still like reading books physically, so you know, there's
there's things like that. And then I think trade associations
are great as well a lot of different trade associations
out there are going to have you know, speakers come
in and uh, you know they're gonna have content and
like their their newsletter blasts and things like that. So
could be a b C, could be associated General Contractors,
(44:44):
could be c FMA, which is Construction Financial Management Association.
Just there's there's tons of resources out there. You just
you just gotta, you know, make that little effort to
go find them.
Speaker 1 (44:56):
And also reading your ebook laying the foundation.
Speaker 2 (44:59):
Sure, yeah, definitely that too. Yeah, check out check out
the ebook.
Speaker 1 (45:02):
Yeah, it's free for download. We'll put it in the
in the notes of this podcast as well. So and
then I just also invite my listeners right schedule your
free tech strategy call with Cody just to kind of
go over these things again, do this pre before after
the fact. So Cody has been an absolute pleasure. But
(45:26):
I'm excited because we are already set to do another
recording in a couple of weeks. So again, thank you
so much for your time and truly to appreciate it.
Speaker 2 (45:36):
Well, thank you, Jennifer. I'm excited to come back. I
know tax reform is maybe not something that everybody gets
excited about, but I'm jazz to come talk about it.
There's a ton of opportunities out there to save people money,
and you know, that's what we want to do. Constructions
a tough business. It's even tougher when you're overpaying in taxes.
So if there's anything we can do to help small
(45:58):
business owners, we want to do that.
Speaker 3 (45:59):
And yeah, I'm looking forward to it.
Speaker 1 (46:01):
Awesome. All right, Well, with that, we'll go ahead and
we'll end it and we'll see everybody next time on
the lumber Yard. Mm hmm.
All right, I want to go ahead and welcome everybody
to the Lumberyard Podcast once again. I am excited to
have Cody Daniels, founder of Builders Tax Group, with us
once again. And this is going to be part three
and we're going to keep continuing on for our series
that we're doing. Really talking about the Book of a
(00:30):
Contractor's Guide to Strategic Tax Savings again. This is his
ebook detailing ten strategies to minimize taxes for contractors and
that is available for free download. Before we get started
into the episode, I want to just again give a
introduction of him. So, Cody Daniels, CPA with over a
(00:53):
decade of experience. He led the construction and real estate
tax team for a top one hundred and fifty CPA firm. Again.
He founded the Builders Tax Group in twenty twenty four,
specializing in tax strategies for construction service trade businesses. And
his true mission is just to help contractors run more
(01:16):
profitable businesses through strategic tax planning, outsourced accounting and fractional
CFO services. So Cody, welcome to the show once again.
Speaker 2 (01:27):
Jennifer, thanks for having me back, and thank you for
the great intro there. The first two conversations we had
were fantastic, and I know we're set to have another
great conversation today.
Speaker 1 (01:38):
Absolutely. So Tommy, what do you have in store for
us today? What is the outline?
Speaker 2 (01:44):
Yeah, so we're going to wrap up the final four
chapters in the ebook here. So our first strategy today
is just confirming that losses and deductions are not going
to be limited for tax purposes. The second will be, uh,
you know, just focusing on state and local taxes as
(02:04):
a meaningful part of your tax liability. Obviously, federal taxes
get the bulk of the focus, but state and local
taxes can have a real meaningful impact on your tax
liability as well. And then we'll round things out with
a state and gift planning, which I think is a
frequently overlooked part of tax planning for most small business owners.
(02:27):
And then the last chapter in the book is more
of a mindset type chapter. It's not the you know,
kind of hard strategy like the other chapters, but it's
just you know, preparing for upcoming.
Speaker 3 (02:39):
Tax law changes.
Speaker 2 (02:40):
We recently had the one Big Beautiful Bill Act that
was passed at the beginning of July, and so just
you know, helping contractors, small business owners sort of like
adopt a mindset around you know, just staying up to
date and you know, being aware of the evolution of
tax law and things that impact their business. Obviously not
(03:02):
expecting anybody to become an expert in these things, but
you know, just taking a proactive approach to you know,
running your business and being aware of opportunities that exists
for you out there.
Speaker 1 (03:14):
So basically, you're telling us four strategic moves contractors should
make before year end to avoid surprises and keep more
money in their pockets.
Speaker 2 (03:25):
Always before your end, we can we can do a
lot of good for you if you get a hold
of us early after the end of the year, we're
pretty limited. There's still a few levers that we can pull.
But always, you know, preach a proactive approach to tax
planning and just overall, you know, operations of your business all.
Speaker 1 (03:44):
Right, perfect, Well, let's just jump into strategy one. So
that's going to be confirming losses and deductions are not limited.
Can you dive more into this for us?
Speaker 2 (03:55):
Yeah, So I think you know, there's a bit of
a misconception around tax planning that we're always trying to
drive our taxable income to the lowest amount possible, and
that's not always the case. You know, there's going to
be instances where, you know, we may want to show
some taxable income because we have expiring credits or expiring
(04:18):
net operating loss deductions, things like that. But in instances
where we are able to generate losses for tax purposes,
we want to be aware of whether or not we're
going to actually receive those benefits in the current year,
because there are numerous provisions within the tax law that
prevent the utilization of losses in the current year and
(04:40):
cause those losses to be suspended and carry forward to
future tax years.
Speaker 1 (04:47):
Sorry you trying to This is talk more about like
the loss limitation funnel.
Speaker 2 (04:53):
Yeah, So I like to visualize this as a funnel.
There's sort of a series of provisions within the tax
law that can and cause losses to get hung up,
so to speak, and you really have to work your
way through the entirety of the funnel to confirm that
you're going to get a partial or full benefit of
the losses. So at the top of the funnel we
(05:13):
have basis limitations. And I don't want to get too
into the weeds on this because how basis is determined
varies by entity type, so there's a little bit of
wants in there. If you're a partnership versus a s
corporation versus a sole proprietorship, there may be different ways
that you calculate your basis there. But effectively, what the
(05:35):
basis limitations say is that you can't deduct losses beyond
your investment into your business, so that would include your
contributions into the business, cumulative retained profits in the business,
and then certain business debts can increase your basis as well,
So that's sort of level one of the funnel. Moving
(05:59):
below that we have at risk limitations, and really the
difference there is that certain debts are not going to
provide you with at risk basis so to speak. So
again it's just a little bit of a nuance there
where we're going to exclude certain liabilities from that calculation.
So assuming that you know you have sufficient basis and
(06:22):
you're at risk for your investment in the business, we're
going to move down to the next step, which is
passive activity losses. So for most entrepreneurs, you know their
core business, they're going to be considered non passive or
active in that business. But for other you know, maybe
like side businesses for a table, maybe you have an
(06:43):
investment in like a rental, real estate or something like
that on the side, or even I guess you know,
other operating businesses. Maybe you're a minority investor in a
restaurant or a bar or something like that. That activity
may be considered passive, so you may not be able
to use those losses against your non passive business income.
(07:05):
So your rental loss may not be available to offset
the income that you're generating through your construction business. Okay,
going a step further, we have this concept of excess
business loss limitation. This is still in effect and actually
was made permanent by the One Big Beautiful Bill Act.
(07:26):
This came about during the first Trump presidency as part
of the Tax Cuts and Jobs Act. Effectively, here there's
a calculation. We're not again we don't need to get
into the leeds on how it's calculated, but you can
only use up to a certain amount of losses from
your businesses to offset other sources of income. So like
(07:47):
wages for example, So if you know you have a
spouse that's earning wages from a job, and you're the
business owner, your losses from that business may not be
able to fully offset your spouse's waging income. Okay, okay,
And then I would say kind of the bottom of
the funnel if you're able to get through all of
(08:08):
those steps and you're still able to deduct your losses.
For lack of a better term, there's a limitation for
net operating losses. Again, this was put into place during
the first Trump administration with the Tax Does and Jobs Act.
Net operating losses can only offset up to eighty percent
of your taxable income. So even if you do generate
(08:30):
a loss from your business in a year, and there's
a lot of ways you can generate losses, right, it
could be accelerate and appreciation. It could be like we
discussed I think back in episode one, using certain deferral
methods available to contractors. If you're using the complete a
contract method, you may be cash flowing because you're receiving cash,
but if you haven't finished the job, you're deferring the
(08:53):
gross profit recognition on that job for tax purposes to
a future tax. Here you might still be experiencing a law.
So there's a lot of ways you can create losses
for tax purposes. All that's to say, next year, when
you go to deduct that net operating loss, you can
only deduct it up to twenty percent of your in
or up to eighty percent of your taxabil income. So
(09:14):
you're still stuck paying taxes on twenty percent of your income.
So again, very nuanced, you know, part of tax law.
But I think it's just important for business owners to
recognize that just because you've generated a loss doesn't mean
you're going to get the full benefit of that loss
in this tax year. And you know, it's worth a
conversation to you know, see how you should maybe plan
(09:39):
around that. So I think one good example of that is,
you know, if my clients, really every year we have
conversation towards the end of the year, they go out
and invest in fixed assets for the business. Everybody knows
that investing in fixed assets is going to trigger accelerated
tax appreciation. We have one hundred percent POE now thanks
(10:00):
to the One Big Beautiful Bill Act. So if they
go out and most construction vehicles are going to qualify
for full write off really all construction equipment and machinery
things like that, So I think you need to look
at well, okay, yeah, if I if I generate a
loss through this accelerated depreciation, am I going to get
(10:21):
the benefit of it? And if you're not, you know,
maybe maybe you think about postponing those purchases to the
next tax here. So I think you know, understanding whether
or not you're going to get these benefits can help
you make decisions around, you know, non tax parts of
your business again, whether you should buy equipment, whether you
should have like a cost aggregation study done on your
(10:43):
real estate. If you're not going to get the benefits
of a cost aggregation study, why incur those costs that
have that study done?
Speaker 3 (10:50):
Correct?
Speaker 1 (10:51):
So at the end of the day, I mean really
emphasizing you need to be able, you need to get
with a text professional before again before year end, to
see if those losses are actually going to benefit you. Absolutely, Okay, beautiful.
Anything else you want to say on that strategy before
(11:11):
going to the next one.
Speaker 2 (11:15):
No, I mean, I think again you've hit the nail
on the head getting with your tax pro before year end.
I think I guess maybe the one thing I would
add is, you know this this particular strategy really ties
into a lot of the things that we've discussed previously.
Speaker 3 (11:29):
Like it ties into enity structure.
Speaker 2 (11:31):
Like I said, if you're an S corporation versus a partnership,
the way you calculate these limitations is going to be different.
You know, it ties into decisions around bonus appreciation. Your
method of accounting is going to have a big impact
on you know, how you're able to generate losses for
tax purposes. So it's really kind of a culmination or
I guess the result of the other strategies that.
Speaker 3 (11:55):
We've considered implementing throughout this series.
Speaker 1 (11:58):
Okay, perfect, Well let's go ahead and go to the
second strategy. Don't forget about your state and local taxes,
so dive right in.
Speaker 2 (12:10):
Yeah, so a couple of things here. I mean, we
have the multi state component of this, where if you're
a contractor going over state lines, there's issues that go
along with that. But I think you know, if you're
a contractor that's operating within your home state and you
never leave the state, there's issues that you need to
be aware of there as well. So I think i'll
(12:32):
start with, you know, kind of the multi state experience
and some of the challenges that can come.
Speaker 3 (12:37):
Along with that.
Speaker 2 (12:39):
If you're a contractor that crosses the border into another state.
There's obviously the income tax implication of that, but there's
a whole other suite of tax issues that they could
impact your business. You have potentially sales and use tax
issues depending on the frequency, and you know, just sort
(12:59):
of your deployment base, you could have payroll tax issues.
So it's not just the income tax implications of that.
And I would say that it's as a construction business,
it's really hard to stay off of state Department of
Revenues radar when you move into a new state and
(13:20):
start doing jobs up there. Number one, I mean you're
likely pulling permits and so that in and of itself
is typically going to require some form of registration with
the state or municipality, county, whatever it may be in
that new state. So that alone is going to put
you on their radar. But I've heard stories even beyond
(13:43):
something like that where auditors for state Departments of Revenue
they may be driving to the office, or they may
be out to lunch and they drive past the job
site and they see on the truck or the van,
you know, big decal ABC construction. Right, they can go
into the office and they can drop your name in
(14:04):
their database and determine if you've been filing with them.
And I've heard that it's not out of question for
an auditor to open up an audit on a contractor
simply because they saw them doing work in the state
and they got their name, you know, plastered in big
text on the side of their vehicle. So yeah, this
(14:24):
is an industry where it's really hard to avoid getting
caught at some point in time if you're crossing state lines.
And the big downside to this is there's no statute
of limitations if you're not filing. So typically for tax
purposes you file your return, either the IRS or the
(14:46):
state Department of Revenue has three years from the filing
of that return to go back and audit it and
you propose adjustments, et cetera. If you've been doing work
in a state for a number of years and you
haven't been filing, there is no statute of limitations, so
they can go back in time. I worked with I'm
located near Chicago, so a lot of my clients are
(15:08):
are Illinois based. I worked with an Illinois based contractor
that started going up into Wisconsin, you know, just over
the border, doing jobs pretty infrequently a few years back,
and they were identified by the state of Wisconsin for
a sales and use tax audit. So this is this
is not income tax, it's sales and use tax. So
(15:31):
what Wisconsin was attempting to gather from this from this
contractor was use tax on materials that were purchased in
Illinois but used that job sites in Wisconsin. And so
we had to go back and effectively self assess late
sales and use tax filings for this contractor, you know,
(15:55):
go back in the records, identify the materials purchases, and
what job sites they were used at. And I think
we ended up settling with the state to file and
pay taxes on seven years worth of activity. And really
for this contractor, at the time, this was a very
small part of their business. I think in most years
(16:17):
it was less than two percent of their annual revenue.
So we're not talking huge, huge dollars here, but still
a big, you know, time commitment really from them, more
than more than a dollars and cents commitment. There was
just a lot of time and effort that went into
this process to go back and determine the liability. And then,
(16:38):
of course, because now the state has the sales and
use tax filings on record. You know, we went back
and chose to file income tax returns for those years
as well and pay any required income tax that was
due during those tax years. Again, I think the fees
that we charge were probably more than the taxes in
most because it wasn't a big part of their business.
(17:02):
But again, it's easy for the state to identify these
opportunities and generate a little bit of revenue. And every
state is hurting for revenue right now, so states are
very aggressive on these matters.
Speaker 1 (17:14):
Now, did the contract or just not realize that they
had to do this, that they were crossing state lines
and this is a requirement.
Speaker 2 (17:21):
Yeah, I think it was just, you know, kind of
an ignorance issue, and you know, maybe a little bit
shame on us for not asking that that was something
they were doing. You know, quite frankly, a lot of
states filing determinations. It's really a cost benefit issue, and
(17:42):
you know, whether it's right or wrong, I will say
that businesses will make decisions based on the cost of
compliance versus the downside or the risk of not filing,
and so you know that's a business decision that business
owners will make. We can recommend that they file in states,
but ultimately, again, if your exposure is pretty low and
(18:03):
the cost of compliance is pretty high, you may roll
the dice and sometimes sometimes you're going to get caught.
Speaker 1 (18:11):
Yeah that's a really good, I mean, real life example
of crossing the state lines. Then what can happen not
filing properly?
Speaker 3 (18:22):
Yeah?
Speaker 2 (18:23):
Yeah, So I think maybe we could switch gears here
and say, well, what if you know, what if I'm
running a business and I don't cross ailienes? What if
I'm only operating within a singular business here? I do
think there are state and local tax issues that those business.
Speaker 3 (18:37):
Owners should be aware of as well.
Speaker 2 (18:40):
There's this concept of a pass through entity tax that's
kind of a new thing. I think a lot of
business owners have started to become aware of it over
the last two three four years. But effectively, what this
past or entity tax election is an election that's made
by either an s corporation or a partnership business to
(19:05):
pay the taxes for its owners at the business level.
And it's really designed to work around the new itemized
deduction cap for state and local taxes. So under the
Tax Cuts and Jobs Act, individuals were limited to a
ten thousand dollars deduction cap for their state income taxes,
(19:28):
their property taxes. If you're in a state that has,
like you, personal property taxes things like that, your deduction
was capped at ten thousand dollars, and it's not up
to forty thousand dollars. Under the One Big Beautiful Bill Act,
it has expanded that, but I think for a lot
of successful small business owners, even a forty thousand dollars
limit is going to prevent them from getting the full
(19:50):
deduction on their state income taxes and property taxes, and
again any other state and local taxes you might be paying,
especially if you're not high you know, high income or
high tax state doesn't have to be income tax you know,
here in Illinois we have pretty high property taxes. So
I have clients that they're total deductions between income taxes
(20:12):
property taxes, but a c forty grand So this past
thro entity tax election allows your business, again if it's
organized as an as corporation or partnership YEA, to convert
your income tax liability on your business income to a
business tax expense from a personal tax expense, so it's
(20:33):
not subject to that cap. In the One Big Beautiful
Bill Act actually preserved this. There was a part of
that bill early on that was going to, you know,
effectively make it unlawful for these states to allow this
or make it unlawful for you to convert this individual
tax liability to a business tax liability, and that was
(20:55):
not part of the final bills. So I think there's
real opportunities there to generate additional federal tax deductions really
by checking a box and cutting the check from a
different bank account. So it's not generally speaking, it's not
going to change your total state tax liability. It's just
(21:16):
converting it to a business expense. So your business is
going to cut the check rather than you cut the check.
And the benefit of it is now you're not limited
to that either ten or forty thousand dollars cap.
Speaker 1 (21:30):
Okay, And I just want to also put a plug
in that. I know I said that this is part
three the final series, but we're actually going to do
another recording in a few weeks to go over the
act that the Big Beautiful Act and dive a little
bit more into that so we could get into more
details on that.
Speaker 2 (21:50):
Definitely, that will definitely be that's on the agenda for sure.
Speaker 3 (21:54):
Good. Good.
Speaker 1 (21:55):
So then when it comes to this just again, what
should contractors do again, ask your tax professional right about
the election and what you can do to avoid these
state and local taxes.
Speaker 3 (22:09):
Yeah.
Speaker 2 (22:10):
Absolutely, you know, have the conversation. Depending on the state
that you're operating in, the election may need to be
done before the end of the tax here. So here
in Illinois, we can make the election on the tax return.
So for twenty twenty five tax here, we'll make that
election in twenty twenty six when we file the tax return.
In other states, you may have to make it before
(22:32):
the end of twenty twenty five. There may be different
cutoff dates in twenty twenty five when you need to.
Speaker 3 (22:37):
Make that election.
Speaker 2 (22:38):
So there is a potentially a time sensitivity issue here
as well that you need to be aware of in
order to get those benefits.
Speaker 1 (22:47):
Good good, Anything else that you want to address with
this strategy before going on to our next one.
Speaker 2 (22:54):
Yeah, One other sort of state tax issue that I
want to bring up is the nonconformity that most states
have with federal tax laws. A big one that I
typically see is depreciation. So, like I said, we have
one hundred percent bonus depreciation back in play. That's a
(23:14):
federal tax law. Different states may or may not conform
to the federal depreciation rules. So you may operate in
a state where they follow the federal rules, and they
may have provisions in their law that, regardless of what
changes are made at the federal level, they'll follow those.
You may be in states where they follow federal law
(23:36):
as of a specific date, so as federal law changes,
they would be operating under old law potentially, so it's
not uncommon. Again, depreciation is always a good example because
construction typically is a very capital intensive business, and business
owners are aware of the benefits they can get there.
(23:57):
But yeah, let's say you wipe out your taxable income
because you buy a bunch of vehicles or equipment before the.
Speaker 3 (24:04):
End of the year.
Speaker 2 (24:05):
That may not that depreciation expense may not be available
at the state level, so you may end up having
a significant state tax liability despite having no federal tax liability.
So it can be a surprise if you know, you're
not aware of it. And so yeah, I think that's
just one thing I want business owners to be aware
(24:27):
of is again, what your income for federal purposes and
not necessarily your income for state purposes, and there could
be very large swings there.
Speaker 3 (24:35):
I mean I had a client.
Speaker 2 (24:38):
Just back in twenty twenty four they did a cost
aggregation study on a property that they invested in, had
a loss for federal purposes, had income at the state level,
and ends up you know, paying state income taxes. So
if you're aware of it, a lot of times, I
think just being aware of these things and not being
(25:00):
caught off guard really kind of eases the pain of it.
So that's a big one. There's some others, you know,
I think, like again kind of going back to our
first strategy with like lost limitations. You know, there's different
like NL limitations that apply at the state level that
are you know, different from the federal level. So here
(25:22):
in Illinois, for CEA corporations, for example, we have a
limitation on the state net loss deduction that you can claim.
It's just capped at a flat five hundred thousand right now. Okay,
So again, for federal purposes, you may be wiping out
a good chunk of your income utilizing that operating loss carryovers.
(25:43):
But at the state level, again, you may be getting
hit with a surprise state tax liability because that limitation
is different.
Speaker 1 (25:50):
M Yeah, it's good to know these. It's definitely good
to know these. All Right, I'm ready to move on
to our strategy.
Speaker 3 (26:01):
Yeah, let's do it.
Speaker 1 (26:02):
Okay, don't sleep on a state and gift planning. Interested
to hear this one, Cody.
Speaker 3 (26:10):
Yeah.
Speaker 2 (26:11):
So, I think again, this is kind of an overlooked
area for most taxpayers. I think people think of a
state planning as for the extremely wealthy, and I think
the reason they think that is I believe the current
state exemption is thirteen point nine to nine million for
(26:32):
a single taxpayer, twenty seven point ninety eight million for
a married filing joint taxpayer. And I believe, don't quote
me on this, the One Big Beautiful Bill Act, I
believe increased that to fifteen million for single taxpayers and
thirty million for joint taxpayers. So effectively, what that means
(26:54):
is if you pass away and your net worth is
less than those amounts, you're not going to be subject
to the federal state tax. So I think a lot
of tax payers think that this is not an issue
for them necessarily. But I think that's again, I think
that's a misconception because there are state level of state
(27:17):
taxes that apply not every state has an estate tax,
and some people call this the death tax, so I
try not to. That's a little morbid. And yeah, you know,
a state tax is the more technical term. But just
if anybody out there, you know, thinks of it as
the death tax, you know, want to make sure we're
on the same page there. So so again, like you
(27:39):
could have a much lower net worth and be subject
to your state level a state tax. I think in
organ the threshold is as low as a million dollars.
Well goodness, okay, and there are many states that are
less than five million. So again, for a lot of us,
that still feels like a pretty sizable amount of net worth.
(27:59):
But if you've been running a successful construction company for
you know, twenty twenty five years, you know, you have
a residence, you may have a vucation property, the value
of your business, the value of your investments, life insurance,
all of these things factor into that calculation. Like it
would not be out of the question for even you know,
(28:21):
small construction businesses, for the owners that have a net
worth that is exceeding the state tax level in the
state that they reside in.
Speaker 1 (28:30):
What if you're located in a state, let's say with
no estate tax.
Speaker 2 (28:34):
So I think even if you're in a state with
no estate tax, it's still helpful to go through this
process because it's going to ensure that you know, you
and your heirs are achieving maximum tax savings and also
that whatever your wishes in life are adhered to in death.
(28:56):
This is not this is not a process that is
exclusive to your CPA. I mean, this is going to
be really kind of your whole financial team. You're going
to have an attorney involved in this process, your financial
planner is going to be involved in this. So it's, uh,
you know, really kind of an opportunity to get the
whole team together and uh, you know, talk about what
(29:17):
you want, you know, out of your life and out
of your business. So again, even if you're not someone
who's going to be subject to any form of a
state tax, you know, what do you want to do
with your business when you pass away? And that's going
to be that's going to be a question that's addressed
during a state planning. You know you have various assets,
(29:39):
do you start to transition those assets to family, friends,
you know, charitable organizations while you're alive, or do you
wait until you pass away and do that you know,
through inheritance. So these are all questions that can be
addressed during like an estate planning session or session more
(30:00):
likely just to ensure that again, you've built a successful
business for yourself, you've generated meaningful wealth. You want to
make sure that that is handled appropriately.
Speaker 1 (30:13):
So what can contractors do now to reduce their estate?
Speaker 2 (30:19):
Yeah, so there's there's some common strategies out there. Annual
gifting is obviously one that that's one that I get
a lot of questions on how much can I gift
to any single person in a given catch here without
triggering any sort of filing. You can gift really any
amount that you want, but you may if you exceed
(30:42):
certain thresholds, have to file a gift tax return and
so again there's a cost of compliance there and things
like that. But right now, for twenty twenty five, the
per recipient threshold is nineteen thousand dollars. So if I
wanted to gift, you know, nineteen thousand dollars to one
(31:02):
of my nieces, for example, I could do that. My
wife could also gift that same niece nineteen thousand dollars.
It's an how're up to thirty eight thousand dollars, right,
and then you know, I could look at my other
nieces and my one nephew and again I could do
nineteen thousand to each of them. So it's a per recipient,
(31:22):
per taxpayer threshold there.
Speaker 1 (31:26):
Okay, what about charitable giving? Can you do that? Yeah?
Speaker 2 (31:30):
Again, that's another common strategy, and there's a lot of
different things you can do within charitable giving. Something that
excites me that I think is overlooked is gifting of
like appreciated assets like stock to the charity. So what
this strategy does for you is it allows you to
(31:53):
avoid the capital gains tax that would be associated with
the sale of that stock. So let's say I have
stock that's appreciated in value, and I say, well, I
want to give fifty grand to, you know, whatever charity
you're invested in. I go out and I sell that
stock for fifty grand and then I kind of check
(32:14):
fifty thousand dollars cash to the charity based on whatever
my initial investment in that stock was. I'm going to
pay capital gains tax on that, and then I'm going
to turn around and get a fifty thousand dollars charitable donation.
Speaker 3 (32:27):
For the for the cash donation.
Speaker 2 (32:30):
What gifting the stock to the charity does is it
avoids the capital gain, but you still get the deduction
equal to the fair market value, so very you know,
beneficial from an income tax perspective, while also having kind
of the additional benefit of reducing assets in your in
your overall estate.
Speaker 1 (32:51):
Okay, Okay, And then I would say probably another one
establish chain trust as well.
Speaker 2 (32:57):
Yeah, and that can tie you know, into charitable giving
as well. You can set up different types of trusts
for the benefit of charities. You can set up you know,
trust to transfer assets to you know again family friends,
those those types of beneficiaries as well. And then there
are a variety of kind of special purpose trusts is
how I refer to them. So you can set up
(33:19):
trust specifically to shelter life insurance proceeds from your estate.
If you again have some pretty meaningful life insurance policies
that would pay out upon death, you can utilize a
trust there to those proceeds are excluded.
Speaker 3 (33:35):
Well.
Speaker 2 (33:35):
That I think is kind of interesting. I've seen a
few clients employ this strategy. Is it's called a qualified
personal residence trust or a KUBERT, and that allows individuals
to transfer you know, like their primary residents or their
vacation residents into a trust while retaining the right to
live in that property for a specified term. You do
(33:59):
have to pay rent, of course, so you're kind of
paying rent on your uh what's.
Speaker 3 (34:03):
No longer your house? But what what was your house?
Speaker 2 (34:06):
So you know, each of these strategies does come with
some nuance in complication, but it can all be effective
ways to remove appreciating assets from your estate.
Speaker 1 (34:18):
All right, I think that those are really good options
for reducing their state. Anything else you want to elaborate
on in this strategy before moving on to our next
one I.
Speaker 3 (34:33):
Want to give. I want to give one other example
that I just thought of this morning.
Speaker 2 (34:40):
I think a question that I am asked frequently is
I have this asset. I want to ensure that it
goes to my kids. Should I gift it to them
while I'm alive or should I wait until I pass
and then they receive it via inheritance? Right? And this
this came up for me in a a very personal way.
(35:01):
Last summer. My grandma was diagnosed with cancer and she
ultimately she ended up passing away last December. But I
remember last summer getting lunch with my parents and two
uncles and aunt, and that was something that came up
at lunch, was well, should we have, you know, should
(35:22):
we have grandma gift to the house to my dad
and my two uncles. And I jumped in and I said, no,
I don't think that makes sense because what's going to happen,
you know, if you receive it through inheritance when she
passes away, is that you'll receive a step up in
the basis of that asset to the fair market value
at the date of death. So if they hadn't done that,
(35:46):
if they had gone through with a gifting while Grandma
was alive, what would happen is my dad and my
two uncles would receive a carryover basis. So in this case,
my grandpa actually built that house. He was a union
carpenter for decades, so he built that house. His basis
was incredibly low. It's effectively just the cost of the
(36:09):
materials because he had no labor component there the land
they had acquired before the house was built. So I'm
sure I don't have hard numbers, but I'm sure the
basis was incredibly low. So if they had gifted that
house to my dad and my uncles, their basis would
be equal to what Grandpa paid to build it, and
(36:30):
then when they turn around to sell it, they're going
to have a gain on the spread there. Well, because
they received it through inheritance. When Grandma passed, they get
a step up in basis to the fair market value
at the date of death. When they turn around to
sell that, there's going to be probably no taxable gain,
maybe a small taxable gain to the extent that it
(36:51):
appreciated between the date of death and the date of sale,
which as long as you're turning around and selling the
property relatively quick, there shouldn't be much appreciation there. So
again I don't have hard numbers, but I would guess
you know, it probably saved them thirty to forty grand
in taxes. I'm making that one decision to wait until
(37:14):
Grandma passed and handle the property that.
Speaker 1 (37:17):
Way, I mean, and that just doesn't even have to
do with contractors. I mean, that's just no, that's anybody
personal exactly exactly.
Speaker 2 (37:25):
Yeah, And again, like Grandma didn't have a taxuble estate. Grandma,
Grandma didn't have a ton of assets, but you know,
just that one, you know, real real big asset that
she did have you know, just making a smart decision
around that, you know, saved several five figures of taxes
for my family.
Speaker 1 (37:45):
Yeah, no, I appreciate. And that's again in real life example,
so that we can all take away from on that
one because we're all going to experience it through through
our life sooner.
Speaker 2 (37:56):
While they say, you know, two things in life for
certain death and taxes.
Speaker 1 (37:59):
So that's it.
Speaker 3 (38:00):
Yeah, it happens to everybody.
Speaker 1 (38:03):
It does.
Speaker 3 (38:04):
It does.
Speaker 1 (38:05):
Well, let's wrap up this, uh, this last one here
with with our four strategy preparing for upcoming tax law changes.
Speaker 2 (38:17):
Yeah, so if anybody does check out the ebook, you'll
notice that this chapter is definitely different. It's more around
you know kind of mindset and providing entrepreneurs business owners
with you know, resources and things to consider as far
as just staying up to date when the when the
book came out, you know, we had no idea when
(38:39):
the next taxical was going to be passed, what was
included in it. So it was really just kind of
to encourage business owners to develop like a proactive mindset
in a mindset of you know, continual learning. Uh, you know,
let's not sit on our hands and wait for things
to come to us. You know, let's be pro active
(39:00):
business owners and work with our professionals to uh, you know,
to develop good tax strategy and to you know, just
do some very basic learning. Just listening to this podcast
is going to put you ahead of your peers. So
just just taking small steps. You know, you're in the truck,
you're driving to to a job site, throw on the
podcast for thirty minutes. You know, maybe you find one
(39:23):
takeaway and you can go talk to your professional and
that one takeaway could save you significant money in the
grand scheme of things. So so yeah, that's really what
the chapter is around, is just, yeah, just encouraging like
a mindset shift amongst business owners to make sure that
(39:44):
this is just an overall part of their business strategy
and they're not they're not leaving it to the last minute.
Speaker 3 (39:50):
Yeah.
Speaker 1 (39:51):
Absolutely, And like I said before, we're going to do
another recording that we're going to go more in detail
with the One Big Beautiful Act.
Speaker 2 (40:01):
Yeah, and maybe just to kind of preview some of
the topics and hopefully encourage some people to check out
that episode. This is just a real quick rundown of
some of the things that we're going to cover in
that upcoming episode, we're and talk about one percent bonus
appreciation being reinstated. We're going to talk about the expansion
(40:22):
of Section one seventy nine and when you might want
to use that as opposed to bonus appreciation. There are
rules around research and development expenditure expensing, which, again, as
we talked about in the previous episode, like construction is
an area where there's research and development opportunities and you know,
(40:44):
being able to identify those and potentially pursue an R
and D credit could have could have meaningful tax savings.
So we're going to talk about that, like we talked
about in episode one, specific construction tax accounting methods. There
were some changes there. There were some less favorable provisions
that were passed in that bill. So a lot of
(41:06):
beneficial things, but one not so beneficial thing is determination
of various like green initiatives.
Speaker 3 (41:12):
So we want to talk about that.
Speaker 2 (41:15):
No tax on overtime, I think is getting a lot
of headlines, and I think a lot of employers are curious,
you know, what does that mean for them from like
reporting perspectives, So we'll talk about that. We'll talk about
the extension of the Qualified Business Income Deduction that's section
one ninety ninety A. And then we'll talk about the
(41:35):
expansion of the business interest deduction limitations. So if you're
a business that has meaningful debt and you're paying significant
interest expense, there's opportunities for you to deduct more of
that potentially. So that's really just on the business tax side.
There's a whole slew of individual tax provisions as well,
you know, going back to the increased itemized deduction cap
(41:57):
for state and local taxes.
Speaker 3 (41:59):
So there's there's a lot of things we could dive
into on the individual side of things as well.
Speaker 1 (42:03):
Yeah, maybe we'll separate that out then for individuals and
then more on the business side.
Speaker 3 (42:08):
Yeah, we can do it.
Speaker 1 (42:10):
I definitely forward that recording. So, you know, just takeaways
or this, you know, talking taxes, someone can easily get overwhelmed.
So what would you say how to avoid actually being
overwhelmed when it comes to taxes.
Speaker 2 (42:26):
Yeah, I mean I think, like I said at this
top of the episode, like I don't expect any business
owner to know this themselves. Any time I'm doing kind
of a you know, networking event or you know, anything
where I'm kind of pitching my business, you know, my
My number one lead in is everybody needs a file
(42:47):
attacks return. Nobody should be filing it themselves. Everybody should
be relying on an expert to do that. So you know,
find your expert, rely on them. You don't have to
go it alone. Even if you're you know, just getting started.
You know, it's kind of a new startup business. The
investment in good financial advice is going to pay for
(43:10):
itself in the long run. So you know, this is
an area where I mean, you know, when you get started,
you got to have your attorney to help get things
set up. I mean, you really need to get your accountant,
you know, in line with you from day one so
that you can avoid mistakes. We fix a lot of
mistakes after the fact. But like I said, if we
(43:30):
can get in on the front end, we can do
a lot of good and save you a lot of money.
I think other things you know to do to just
kind of avoid feeling overwhelmed by it is listen to
a podcast like this where there's experts coming in and
you know, you know what you do well. If you're
a plumber, you know plumbing really well. You don't need
(43:52):
to know every aspect of running a plumbing business. You
can rely on experts. And it's not just for tax
and accounting advice. I mean that's everything that could be marketing,
It could be in legal, insurance, et cetera. You know,
assemble your your team and uh, you rely on them.
I think, you know, there's publications out there. You know,
(44:12):
a construction business owner, there's there's gonna be different written
publications to a podcast listener, you know, kind of a
little more old school and.
Speaker 3 (44:20):
Like to read.
Speaker 2 (44:21):
I still like reading books physically, so you know, there's
there's things like that. And then I think trade associations
are great as well a lot of different trade associations
out there are going to have you know, speakers come
in and uh, you know they're gonna have content and
like their their newsletter blasts and things like that. So
could be a b C, could be associated General Contractors,
(44:44):
could be c FMA, which is Construction Financial Management Association.
Just there's there's tons of resources out there. You just
you just gotta, you know, make that little effort to
go find them.
Speaker 1 (44:56):
And also reading your ebook laying the foundation.
Speaker 2 (44:59):
Sure, yeah, definitely that too. Yeah, check out check out
the ebook.
Speaker 1 (45:02):
Yeah, it's free for download. We'll put it in the
in the notes of this podcast as well. So and
then I just also invite my listeners right schedule your
free tech strategy call with Cody just to kind of
go over these things again, do this pre before after
the fact. So Cody has been an absolute pleasure. But
(45:26):
I'm excited because we are already set to do another
recording in a couple of weeks. So again, thank you
so much for your time and truly to appreciate it.
Speaker 2 (45:36):
Well, thank you, Jennifer. I'm excited to come back. I
know tax reform is maybe not something that everybody gets
excited about, but I'm jazz to come talk about it.
There's a ton of opportunities out there to save people money,
and you know, that's what we want to do. Constructions
a tough business. It's even tougher when you're overpaying in taxes.
So if there's anything we can do to help small
(45:58):
business owners, we want to do that.
Speaker 3 (45:59):
And yeah, I'm looking forward to it.
Speaker 1 (46:01):
Awesome. All right, Well, with that, we'll go ahead and
we'll end it and we'll see everybody next time on
the lumber Yard. Mm hmm.
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Crime Junkie
Does hearing about a true crime case always leave you scouring the internet for the truth behind the story? Dive into your next mystery with Crime Junkie. Every Monday, join your host Ashley Flowers as she unravels all the details of infamous and underreported true crime cases with her best friend Brit Prawat. From cold cases to missing persons and heroes in our community who seek justice, Crime Junkie is your destination for theories and stories you won’t hear anywhere else. Whether you're a seasoned true crime enthusiast or new to the genre, you'll find yourself on the edge of your seat awaiting a new episode every Monday. If you can never get enough true crime... Congratulations, you’ve found your people. Follow to join a community of Crime Junkies!
The Breakfast Club
The World's Most Dangerous Morning Show, The Breakfast Club, With DJ Envy, Jess Hilarious, And Charlamagne Tha God!