Tax Strategies That Will Leave You BROKE
In this episode of the Main Street Business Podcast, tax attorney Mark Kohler and host Matt Sorenson warn small‑business owners about five viral tax strategies that are oversold and often harmful for the majority of Main‑Street entrepreneurs. They dissect each strategy, explain why it typically fails, and offer practical triage steps for listeners who may have already adopted them. The five strategies are: (1) Qualified Small Business Stock (QSBS) Section 1202 election – a C‑corp election promising a tax‑free sale that only works for rare, high‑growth startups; (2) Forming an entity in a low‑tax state to avoid resident state income tax – ineffective because tax liability follows the owner’s residence, not the entity’s domicile; (3) Cost segregation for accelerated depreciation – valuable only for real‑estate professionals or owners with qualifying self‑rental activity; (4) Using a C‑corporation for a small business – results in double taxation and rarely offers net benefit; (5) Promoting life‑insurance as a primary tax‑wealth vehicle – generally unsuitable for most people and often driven by commission motives. Throughout, they stress the importance of obtaining a second opinion from a qualified, independent advisor, promote their Main Street Tax Pro network and KQS law firm services, and outline remediation actions such as state domestication, S‑corp elections, and restructuring life‑insurance policies. The episode ends with a call to listeners to stay educated, seek professional counsel, and avoid “easy‑button” tax fixes.
Chapters
If you're getting pitched any of these five strategies, get a second opinion from someone that's not selling you the strategy. We're talking typically thousands of dollars with any one of these strategies. Spend three to five hundred bucks to get an independent advisor to just say,
here's what I think, here's how state income tax works. You get taxed based on the state income tax where you reside and where you earn income. The state income tax you pay has nothing to do where you set up an entity.
You have a C corp, you will pay more tax as a small business owner due to double tax. And I know you want to say, but my individual rates are higher and if I have a S corp, it's gonna flow through at a higher individual rate. Yes. But to get the money out of your C corp, you're gonna pay a lower rate of 21%. Then you're gonna pay your income personal tax.
Welcome, everyone, to the Main Street Business Podcast with Matt Sorenson and Mark Kohler. We are so excited to be with you today, but we're here to debunk.
You're here to warn, to protect, to serve.
This is a public service announcement today because someone's gotta do it.
Yes. And there are so much crap out there in the influencer space, we'll call it that maybe some might say on TikTok. Not that TikTok's bad. There's some fun things there, of course, and some good content to begin with, but there's a lot of promotion out there that's not accurate.
Yeah. And we're not gonna be talking about the dumb dance moves you should or shouldn't do on TikTok, but we're talking about tax strategies. There's a bunch of people out there pretending to be tax experts trying to tell you what to do with your money. And you know what? If you jack it up, they're not going to jail or prison. You are.
Yeah.
Just ask the Wesley Snipes, okay? The guy did time, he did real time for following some bozo's tax advice. And I'm worried it's going to happen to some of you following these stupid tax strategies or even, let's say that's not even you. It's not about jail or prison. But you know what? Some of these tax strategies, you're going to pay more tax than you should.
Yeah. Penalties, interest, audit is no fun. And why are these influencers or people that don't have tax expertise talking about this? Because they have nothing else to talk about and they're trying But I say it better than the accountants out there. Whatever. Okay, so today, here's what we're doing. We're going to share five. Did we say scams, Viral tax strategies that don't work for most people. Now that's the problem here. Some of these strategies, all of the strategies work in some instances incredibly well, but they don't work for the masses by any means. So we're going to give you what to look out for. And I'm going to say right now, the biggest takeaway is if you're getting pitched any of these five strategies, get a second opinion from someone that's not selling you the strategy. We're talking typically thousands of dollars with any one of these strategies. Spend three to five hundred bucks to get an independent advisor to just say, here's what I think. And get someone that's planning oriented and forward thinking. Of course, if you go to some bozo that's 85 years old and doesn't know what's going on today, they're going to shoot anything down. But you know, you gotta get. Yeah.
And also like, look at the credentials of someone selling you this strategy or idea. Right. How are they licensed? Are they an attorney? Are they a cpa? It's just like any, like health or medical stuff, you should eat that, you shouldn't eat that. You should do this. You know, are you a nutritionist?
Are you a doctor?
Like, what license do you have? You know, I mean, so be careful out there with who you're getting your information from. So let's hit these strategies. Let's just jump into it.
Want to go in order?
We already talked USPS 1202.
Yeah. And people be on the lookout for next week. We're planning on the legal or asset protection scams or viral strategies that don't work. So we're gonna hit the legal next week, which by the way, the word LLC is gonna come up quite a bit next week. Number one viral tax strategy that doesn't work for 99% of people is the QSBS 1202 strategy, which is qualified small business stock 1202 election. Which means you're going to make this election at the beginning of the formation of your company, be taxed as a C Corp. And five years from now, lo and behold, you're going to sell your company for $10 million or more, tax free. That's the pitch. Sounds great. It works for about one in a thousand people. And that's the reality.
Yeah, we've done a separate podcast on this. We just get lots of questions about it. And it's kind of this, what type of entity should I set up? You know, we set up 400 entities a month, you know, here. And we're always having that conversation with clients and we're never falling on the C Corp. Despite this opportunity where you could sell your business and qualify to have qualified small business stock and pay no tax. Now, now here's why, when you are a C corporation, you volunteered to pay more taxes. You're operating. You've decided I will pay more taxes
during that five year run up.
My five year, 10 year, 20 years. However, you own this small business, okay. It's not this five year run up.
Maybe if you're lucky.
I mean, are we talking like some Silicon Valley startup? That's who it works for because you have this window of run up and you probably don't make any money, right?
Yeah.
These startups at these tech companies and they go sell for millions of dollars. Okay. That's who that QSBS works for. That's who uses it, that's who's really talking about it. But if you're Main street small business owner, that's not your business. That's not your lane. You don't get funding from venture capitalists that keep you afloat to pay your payroll until you make a dollar so you can sell your business for $100 million. That's, that's not you.
Yeah, yeah.
So you got to run a business, make some money. And when you do that, you're going to pay C Corp tax and pay more tax to operate the business.
I have never seen in 25 years of practice as a legitimate tax lawyer licensed in multiple states. I speak for Matt as well our entire team. I have never seen a client use the 1202 stock strategy in real estate, medical profession, manufacturing, agriculture, online selling. It doesn't work because you pay so much tax to show the income to get the multiple in order to sell your business that by the time you get the tax free sale, if you do, you've already paid too much tax to get there. It doesn't pay off. Yeah. So that's it.
Yeah, yeah. And I'll just say one other thing and here's the, here's what you're going to do. You're going to shoot yourself in the foot. No one's going to buy your C Corp stock. No small business, no person wanting to buy a business wants to buy a C Corp. And let alone buy the stock of a C Corp. The only people who do that are big corporations or Private equity funds, they're going to try and make it even bigger. Hence, again, this works in the tech space. So if you're a small business, you have to sell it as a C corp. Someone's going to pay less for it. Now you're back to where you started.
Number two viral tax strategy to avoid is setting up your entity in another state to avoid state tax where you live. You think, oh, I live in California. I can set up a Wyoming and Nevada, Delaware, Texas, Florida entity. I can be in New York and set up a Florida entity. And by setting up an entity in another state, I'm not going to pay state tax where I live. Wrong. That's it.
That's it.
It's so straightforward. Let's unpack.
Nothing does not work. Okay, here's what happens. How's your state? Here's how state income tax works. You get taxed based on the state income tax where you reside and where you earn income. Okay? So no matter the state income tax you pay has nothing to do where you set up an entity. There's nothing to do where I set up an llc. I don't know how, what, But I
have a server and I do online sales or I do YouTube and I publish it through my website and my entities set up in Nevada and my servers in Nevada. Doesn't that work?
Okay, Gavin Newsom does not care. The governor of California does not care. And no, Arnold Schwarzenegger didn't either. Okay? If you live in California and you make income anywhere, you can make it in the world.
Yeah.
Or in Mars.
That's right. Freaking Matt Damon Marshall.
Yeah.
Yeah.
It doesn't matter where you make it. The state of California is going to tax it. Okay? And so be careful about setting up and thinking you're going to avoid your state income tax. Now, let's say you do make money in Texas, where there's no state income tax and you live in California. Cool. You will not pay income tax in Texas, but you're still gonna pay in California. You've got to leave. Now, if you move to Texas and you make income in Texas and you live there and you're no longer a resident of California, that's how you get out of state income tax.
You want to get out of Illinois, New York, California, these huge blue state tax rates. Move out of the state.
Yeah. Why do you think Mark Wahlberg left California for Nevada? He literally had to leave. He couldn't just be like, well, I'll just set up an LLC in Wyoming or Nevada. No, he had to move yeah.
Justin Timberlake, Wyoming. They move because they want to pay less tax and enjoy a different lifestyle. And that's what's required. So the end. Now, if you want to set up an entity in Wyoming or one of these other states for asset protection, that might work. Stay tuned for the other viral legal strategies may not work. That's going to be the next episode. So we'll tell you when that really works too. All right, number three, next one that
doesn't work for most people is cost segregation. Okay. There's a strategy in real estate. When you own rental properties in real estate, do what's called a cost segregation that accelerates your depreciation expense. It gives you more write offs right now in terms of depreciation that you can use. However, those write offs are useless unless you are a real estate professional. Hence, this is not for most people, it's only for real estate professionals.
Yeah, and I will add a couple caveats. If you qualify for the short term rental strategy through material participation, you might unlock the cost seg. If you have a self rental where you own your own little building or warehouse that you rent or a commercial condo to your little office space, if you own the building in which your business rents from and you have continuity of ownership, you can do a cost tag. That's it. Self rental, a short term rental or a long term rental. As a real estate professional, that's it. And when these big syndicators are on their thousand person calls and they're like, oh yeah, we're doing a cost Sega, this, you know, huge hotel or commercial building and it's going to drive a bunch of depreciation down to you guys and your K1s. Doesn't help you. Doesn't matter.
Yeah, you don't get. Now you, you get to carry that forward and maybe you do have cash flowing rentals and even where they're tax positive on the K1s, I've had some of those in years where I have properties with loss and I have properties with gain on the K1 and those can net out. So it sometimes can help, but it is just not everybody should be chasing this. It's not a reason to necessarily buy real estate. Make sure you understand the situations where this works. Real estate professional, self rental, short term rental loophole. Or maybe you've got some K1s with some positive net income or rental income on properties and you're thinking maybe I cost sick.
All right, number four, viral tax strategy that does not work 99% of the time is that of setting up A C corporation to run your business. And the pitch will be well you can have a different fiscal year, you can change your year end and kick taxable income to the next year and get the use of that. And then oh, you're going to get more write offs with the C Corp. And then they add insult to injury and want to set up your C corp in another state. And oh, you can borrow from your C corp or the C corp tax rate is 21%. These are going to be their pitches. Please do not be sold on this. Do not get bamboozled or tricked. When you have a C Corp you will pay more tax as a small business owner due to double tax. And I know you want to say but my individual rates are higher and if I have a S corp it's going to flow through at a higher individual rate. Yes, but to get the money out of your C corp you going to pay a lower rate of 21% then you're going to pay your income personal tax. Oh, so in the end I pay double?
Yes.
Well I can borrow from it. Yeah. And then you're going to pay the piper someday. And we've had those nightmare conversations with clients. Avoid the C corp.
I don't even think I need to say anything but amen. That's all that needs to be said. Hallelujah. Yeah. Praise, Testify, testify.
Brutal. And that's where a second opinion can really come into play because you can go to your tax advisor and go, hey, you know what, tell me what the numbers would look like if I was a C corp. And sometimes we use a C corp. This is where the half truth comes in on this. See cost seg works for some people. The 12 or 2 does work for some people. But in this the C and moving to another state can work. If you want to move your butt to another state. It's these half truths that kill us. So a C corp could work in a little health care strategy.
Yeah, maybe a blocker corporation to avoid UBIT and a self directed structure. Maybe you are like raising money in a certain way in a company where you need to be a C Corporation, maybe your shareholder rules. You're going to have more than 100 shareholders. You're going to have retirement accounts as shareholders in a significant way. In an operating business there's situations where you could be a C corp. It's just not for nine out of 10 Main street business owners. In fact 99 out of 100, actually 9,990 5,000. That's where I'm going to Put it
all right now before we share the fifth and final viral tax strategy that we think is oversold to the masses by far. Quick commercial break and tell you that if you are looking for a tax advisor that speaks Matt Sorenson and Mark Kohler. We have the Main Street Tax Pro network where I am literally training hundreds of CPAs and enrolled agents twice a week. And they have to go through 800 quiz questions, 12 modules of tax and legal and estate and wealth building strategies, and frankly, not always me teaching them. We learn together. It's an amazing call twice a week. Matt participates at least once a week.
There's some awesome people involved. Oh my gosh. Lots of great learning.
We learned so much. So if you're a tax advisor looking to build a bigger and better client base and use tax advisory pricing clients, we have clients all over the country starving to meet you. If you're looking for a tax Advisor, go to markjkohler.com Click on the TaxPro Network at the top and you can start scrolling through all sorts of certified advisors. And the only way they get on that list is if they are actively meeting in our trainings every week and they are involved and they're trained and certified. Check it out. Young or old, male or female, big firm, little firm, east coast, west coast. And do not think you need to have an accountant down the street. They can get on zoom and serve your needs and understand your business. So you, there's help out there. So when you see the. I know many people are like, you just told me all these things don't work. Where do I go? Taxpayer network.
There you go, There you go. Easy. And yeah, I've, I've just been on those calls with Mark and tax and legal360 conference is coming up. A lot of the people from the network are there. So you actually meet people, lots of business owners. So that's the place to be. That's where we're getting all this tax work done and where you can meet the people that are of the mindset of what we're doing here every day on the Main Street. Business podcast number five is going to be the overselling of life insurance. I'm frankly sick and tired of it because I hear people selling life insurance as a tax strategy or life insurance as a way to build wealth or life insurance instead of a retirement account. Okay, Life insurance is insurance. Yes, there are some investment aspects to it. Yes, there are some people who use it to build wealth. But I'm just telling you as a guy that's done the 10,000 hours. The 10,000 consults with successful business owners and investors. I can't tell you one that is wealthy because they bought life insurance.
Yeah.
Okay. It's insurance when you die. Yes, you can have some cash value in it, but it is not a wealth building strategy. It's not a tax strategy.
Well, and here's the, the, the difficult part. And because we work with a lot of financial advisors and that know how to use life insurance properly. Can you build with life, Build wealth with life insurance? Absolutely. Are there some unique aspects of the right type of crafts crafted policy that doesn't mec out? You put in the right number of premiums at the right time based on your age and your overall wealth portfolio? Absolutely. But again, it's for the few, not the masses. And so what happens is people that are good at sales. We're just talking this with our studio producer. He was like, yeah, I got a buddy, he's great at sales. He can sell anything and he's making a killing with life insurance. Does. Are they. These types of salesmen always do they always have the best interest of the, of the consumer. At the end of the day, the commissions are significant. And so you've got to get a second opinion when you go down this life insurance route. Again, it can work. Not saying it doesn't.
Yeah. And I, there's a place for life insurance. I have life insurance. Mark and I have life insurance on each other. You know, I've got it for my family. I'm not. There's a place for life insurance, even whole life insurance. But it is not a substitute for everything else. And I'm sick and tired of it being this one size fits all of like, oh, you know, don't do business ownership, don't be an entrepreneur, don't be real estate. Just buy all this insurance. It's like, wait, what? That's. It's not. That's not what it's for.
Yeah, it sounds too good to be true as well.
Yeah. And you just bank on yourself. What?
Infinity? What? All right, Matt. I think it's fair to our audience before we wrap up the show. This is very important for any of you that may have implemented or taken some action on one of these five strategies. Let's quickly go through just what the triage would be and where you go next. If you're in one of these messes, do you want to choose one that you would.
Yeah. Let me talk about avoiding setting up the entity in the wrong state. Okay. This is probably the most common one we run into here. We're setting up entities in all 50 states. Okay. Let's say you are in California and you set up the Wyoming LLC for your business that is actually conducting business in California. Okay. You have an operating business. All right.
Okay.
Here's the first thing you need to do. You need to either register it from Wyoming into California, or you can do what's called the domestication and move it from Wyoming into California. So now it's the same entity. I can keep the same bank account, even same tax id. Same tax id. I've just changed the state it's domiciled and I use the California, Wyoming there as an example. This could be any state. If you got the entity in the wrong state and you need to get where your state, where you reside or the state we have a rental property located. We're always setting up the entity in the state where you do business or where you own a property. And so we can move entities with doing what's called a domestication and then closing it out in the old state.
Love it.
Easy now.
That's the action. I'm going to actually say the first thing to do. If any of you have set up the energy wrong site, this is what you're going to bring up in your console. Get with one of our tax lawyers and lead with that. Say, I think I have the entity in the wrong state. Should I keep it or not? That. Start there, you know, like just don't
want throw the baby out with the bathwater.
There may be some reason why you're doing this. It could be a variety. It could even be for asset protection. That makes sense. But get that consult. You can go to kqslaws.com schedule an hour with an attorney and say, hey, I've done this. Help me unwind it if I need to. But if you do unwind it. Matt gave them steps.
Yeah, yeah. And we have a service called the Cleanup. Okay. It's one of our most popular services because this happens so much.
I love it. Okay. Now I'm going to go back to our first one too, on the QSBS 1202. So if any of you have made that election and you now have qualified small business stock and made a C Corp election in your operational business, and I'll say lead with a consultation. And then what the remedy will be is making an S election. You're going to retract that C Corp election and just go back to a plain old S Corp, which is what every dentist, doctor, lawyer, accountant, landscaper, realtor, broker, Contractor. That's what we all are and they work great. So we're going to get you out of that C corp back into an S with an S election. Now there is a look back period. You have built in gain issues. That's why a consultation is going to be very important. How long did you operate as a C corp? Do you have appreciated assets in that C corp? What's been going on just to make an S election is not an easy button either. But it. But if you give it a few years, you'll be home free. So there's a process and you can get out of that train wreck right away.
Yeah, we do S elections all the time for clients. Going from llc, that's just a sole proprietorship or partnership and having that taxed as an S corporation, that is easy. Going from C to S is not as easy, but it can be done. And we're doing it every month. Someone's got to do it here. So get the console and then move back to what you need to be. Now remember, here's the other thing. On this qsbs, you only have to have it for five years. So you could start as an S corp and then be like, hmm, I might want to sell this business in 5 years and QSBS could work for me and do a consult. We have lawyers that have done those consults and analyzed it. Most of the time they're saying no, but I'm just saying on that strategy, rather than jump in on it at first, move into it later. If you really do think it could
work in your scenario number four, easy answer.
We already talked about the C corp, so. Same thing. The same thing. You set up the C corp, you should have been in an S corporation. Just do the S selection. Remember, you got the built in gain issues, so. All right, well, let's cost seg. What? I mean man, if I've already done the cost seg, I'm kind of sunk. Well, can I get. It's already been on my return.
Yeah. Here's what I would say. If any of you have done the cost segment, you weren't able to take the write off. That means you've got a huge carry forward loss in your real estate portfolio. Okay. It's not a bad thing. I've got a big one I'm carrying forward. I'm not a real estate professional, but the beauty of that bucket is you can dump it out on the sale of a property and not have to do a 1031 exchange. So if you've already done a cost seg, this is a great time to go, huh? What's in my real estate portfolio? Is this a good chance to maybe harvest some gains over here on this rental and I'm going to go buy two more rentals and I don't have to do the 1031. I can dump that bucket out. So you can dump that cost seg out on any of your rental property sales, which could be really, really helpful. So. And you're going to carry it forward till the day you die. So don't think all is over. You paid for a seg, that's fine. But you're going to be able to dump that loss out. Now there's going to be recapture of depreciation on the sale of property depending on how long you held it. But again, this is where you do that consult and go, huh? Maybe there's a way to harvest it and use it.
The life insurance that's been oversold. I think this just have an honest conversation and maybe this is where you get the financial advisor in your life that's a true fiduciary and not a life insurance salesman. I hate to say it. You know, you might have your financial advisor at Northwestern Mutual or New York Life and I'm sorry, that person's not a financial advisor, they're a life insurance salesman. I know they might be good and that you might, you know, you might give some good advice or whatever, but they do work for a life insurance company. That's why you probably have a lot of life insurance. So get a unbiased opinion from someone who's a fiduciary. That said an ria, we've had them. Michael Bradley and Randy Lupke were just at our self certifier summit talking about this and getting independent advice. And it's no surprise that when you have an advisor that works at a broker dealer or what are all the investments they end up having you buy broker dealer products. When you have an advisor that sells life insurance, what do you think you have in your portfolio? A bunch of life insurance.
Okay.
It's because they're beholden to their employer. Get a fiduciary who's supposed to be making investment choices for your best interest, not the company they work for.
Totally. And the good news here is that almost every life insurance policy can be restructured. They can take that cash value and convert the policy to term get. You can convert the policy to a different type of whole life policy. Life insurance agents, frankly, or financial planners, the whole crew, they love to crap on something else. Someone did. So if you go to an independent advisor and go, I got this policy. What's it really for now, they hopefully will say, well, here's the good, the bad, and here's what we can do to convert it and change it. So life insurance policies can be restructured very, very easily, for the most part. And again, there can be some ramifications, and you have to have a reality check. Some of you may say, you know what? I'm going to stay the path. I'm going to keep building that cash value. I'm okay paying those premiums. I know in five to 10 years from now, it's going to pay off. Okay. But know the plan. Have a reality check. Here is the biggest, you know, final takeaway, if I may. And then I'll. Matt, I'll let you wrap it up with your perspective on this. We encourage all of you to continue to learn about cool tax strategies and understand the strategies you're implementing on your tax return. Just the fact you're listening to our podcast makes us so exciting because you've caught the vision. You are the captain of your ship. If you're here, we've just, we turned around from the pulpit and we're preaching to you, the choir. You know, we need you to leave the building and go tell all your friends, hey, it's okay to get to know taxes. Go recruit, go proselyte and tell people, yes. If you're a business owner, you got to know this stuff. It doesn't mean you're going to prepare your own tax return. It doesn't mean you need to go figure out all the strategies. But when it sounds too good to be true, like an easy fix and the person you're hearing it from is either selling you or they're not licensed or credentialed, doesn't mean it's bad. It means second opinion. That means you're gonna go get a second. We have 14 tax lawyers that you can turn to at any point in our law firm from around the country. Kqslawyers.com Do a consult and say, hey, what do you think of this? Based on my fact pattern. And they're gonna say, oh, this could work.
Yeah. Well, I'll even say on that is have a freaking plan, okay? Have a plan with someone who's qualified that's done this a hundred thousand times, and go over that plan for your specific situation. See, the problem is, and we hit these tax strategies, one of those five could work for you. You might be someone that one of those five works for you. We just crapped on all of them. One of them could work for you, but we don't know that. I can't tell you which one of you that is. But we can get in with KQS lawyers. Our attorneys can do a trifecta. Go over your situation. Recommend the strategies that work in your situation and one that don't. Create a task list. Create opportunities where you're going to save taxes, where you're paying too much. Right now, there's tons of planning opportunities and strategies that can work in your situation. I wish there was an easy button. Sometimes these strategies are sold as the easy button. Just do this and you won't pay tax. No, no, no, no. Okay, good. Tax planning is about doing 10 or 20 things right. And considering 50. But you pick the 10 or 20 that work in your situation. So we do that. We'll do your trifecta. Get that set up over@kickykills lawyers.com and that's what we're here to do for you.
Yeah. And to say we, quote, unquote, craft on these five strategies. No, no, no. I may rephrase. Is we craft on them being sold to everybody. Yeah, that's what the frustrating part is for us because we have to be the bad guys and unwind these for clients that actually take action or be the bad guy and tell them it's not going to work for you. And many people are, thank heavens I at least called you. But that's the issue. There's so many strategies out there that could be a great. I mean, we literally were like, ooh, should we throw that on the list? Should we throw that one on the list? There's probably 10 or 15 here, and they just didn't make our top five. So that's why listening to this podcast on a regular basis is so important, too, so that you can stay in tune with what works.
All right, well, thank you everybody for tuning in to this week's episode of the Masonry Business Podcast. Like Mark said, next week we're going to be back talking about the five viral legal scams. Scams. The word.
Yeah. That don't work.
That don't work for everyone.
Yes.
Okay. We're being very PC today, I guess.
Scams. I want to call them scams.
Usually we just go for it a little bit. PC today.
Yeah.
But thank you for listening. If you're still listening to this show, you like it, go give it a five star review. Make sure you're subscribed so you don't miss any of the future episodes, and we'll see you next week.
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