How Business Owners Turn Tax Planning Into an Asset

Most financial conversations, in our experience, they begin with a familiar question: how much did you make? When, when you're speaking to a business owner, you know, making money is one skill. It's, it's taught predominantly out there, especially to business owners. Not losing it is an entirely different skill set that doesn't get taught or talked about enough.

The words we use determine our wealth. If you say, I want more income, You're going to end up okay. But if you say, I want more cash flow, the world is yours and everything in it. Taxes are an asset class unto themselves. If we're willing to plan for how much equities we have or, or plan for retirement, taxes should be part of planning.

A strategy can be mathematically tax efficient but practically terrible for the person using it.

Look, I had an offer to sell this business. It wasn't what I wanted. It's so cool, Ro, that I have a 7-figure pension on the back end. So who it doesn't work for is someone who can't commit to something for at least 3 years. We got a call a couple weeks ago. I'm a real estate agent living off a HELOC.

I've heard and watched a bunch of videos and I've heard this thing is the greatest thing since sliced bread. Can I just dump a chunk of money in here? This is a commitment. There's a minimum premium, there's requirements. It goes for a while.

All right. Well, welcome back to Wealth on Main Street. You know, most, most financial conversations in our experience, They begin with a familiar question, right? How much did you make? When you're speaking to a business owner. And we're going to go a lot deeper today. How was the capital created? Where's the liquidity? How much of that income survives taxation? And who actually controls the cash flow, right? Once all the experts and institutions and government agencies have taken their seats at the table. And we've said this so many times on the show that making money is one skill. It's taught predominantly out there, especially to business owners. They've been there, done that, got the t-shirt. Not losing it is an entirely different skillset that doesn't get taught or talked about enough. And so our guest today literally lives at that intersection. So Rohit, this is going to be a good conversation. He's the co-founder and chief solutions officer, as I understand, of The Owner's Asset. And we're in collaboration together with the Ascendant Financial team. And Rohit works primarily with small business owners, 1099 pros, CPAs, just helping them think through retirement planning and tax strategy, estate planning, risk management, long-range financial structures. What's really interesting is given that he's a pension specialist, he incorporates whole life insurance into US tax and estate planning. And given that we were just chatting about this before we hit the record button, being a former chief investment officer with a background in capital markets and investment management, private wealth, and enough financial credentials to make the rest of us reconsider the confidence with which we once opened a Robinhood account, Rowan earned his MBA. in finance from Georgetown. And I think he's got a BA in economics too. I can't remember the institution, but I recall reading that. But what caught my attention ahead of today's convo was something really more personal. He recently shared that he was rereading the book that Rich and I co-authored, Cash Follows the Leader. And specifically, he referenced 4 words: capital, liquidity, income, and cash flow. And those words sound simple, much like eat less and exercise more does. But then, then you got taxes, employees, payroll, retirement plans, family obligations, everything that, that business owners deal with. And so today we're going to explore what those 4 words really mean for business owners, and we're going to talk about cash balance plans, 1099 income, whole life insurance, taxation, retirement. But, uh, as you listen, Rich and I and Rohit, we want to invite you to join the conversation. If something that we say either causes a reaction, challenges what you believe, or maybe confirms something you've experienced, or makes you just yell at your phone while you're running or driving, just leave us a comment. We want to hear your questions and the part of the conversation that we're going to share that makes you stop and think. And so Rohit, welcome to Wealth on Main Street.

Thank you. Thanks for having me, both of you. I sincerely appreciate it.

And you referenced the 4 words from Cash Follows the Leader: capital, liquidity, income, and cash flow. Which of those 4, I'm curious, do you believe business owners understand the least? And what does that misunderstanding cost them?

That's such a loaded question to start. I'm actually going to take those 4 words and combine 2 of them. And we had no plan to go here, Everyone listening, this is not even remotely scripted. So, okay, how do I say this? If I were to summarize my entire worldview into one sentence and what we do at The Owner's Asset is we actually specialize in turning income into cash flow. In the US tax system, all income is taxable. And actually, the IRS has 5 different ways to classify it: active, passive, provisional, right? Not all cash flow is taxable. And I'm talking to 2 guys who are the leaders in the field of infinite banking and definitely understand that last part. So if you say the question was which of these 4 words matters most or is most misunderstood, I actually believe it's the process of turning income into cash flow where the intrepid, the entrepreneurial business owner can change the game. I— that's where I spend all my time thinking. So maybe it's a cheeky answer to your question, Jason, but And that's why I fell in love with the cash balance in the pension system, because you can take taxable income and turn it into cash flow. And that's the alchemy of modern finance.

You know, when you meet a successful business owner for the first time, you know, what can you usually tell about their financial life before you ever see a statement?

It's oftentimes they're a passive participant in their financial life, right? I don't know if that's the answer you wanted to hear, but what I find When we come into someone's life, we always get the following. So somehow the way the world works, I don't call it manifestation, call it, call it, you know, signaling theory. But someone comes into our orb when they're about to do the following. And I know there's people just listening, but if you're watching, you get to see me gesticulate wildly here. They go, I'm paying too much in taxes and I don't know where it all is.

Right.

And the fundamental tension that they're talking about is one of your favorite words. And I have reread your book, is the word control. As you get to a certain level of success as a business owner, And it's what you said, you get it. Making money gets a little bit easier as your networks grow, your skill set grows, your specialty grows. But keeping it's the hard part. And here's where Cash Balance Plan becomes very interesting. And the tax code in general, the tax code, I describe it as 2 things. One, it's a roadmap to freedom. If you understand it, it's actually your friend.

Oh, it was written to incentivize us.

And that's the second thing I always say when I talk to people is the tax code is, is actually an instrument of social change that governments use to create the behavior that they want. And we'll give specific examples later of how they're doing it in the US for S corps in particular. There is a gigantic multi-billion dollar game of sleight of hand happening in the US tax code right now today. Okay, so we're talking about control. The tax code exists to help you. And so it turns out you can keep more of what you earned if you're willing to think medium to long term with it. You can actually create up a pension, you can get a deduction Guarantee— we're allowed to use that word in the world that we play in, right? To guarantee the outcome that you want. Super cool. And I got so enthralled by that question, the question of how do you turn income into cash flow, and how can you buy the golden asset, dividend-paying whole life? How can you buy it at wholesale prices, not retail prices? Okay, so 5 years ago I started this company. That's what I'm doing.

How would you like to see a 91-year case study that we put together to explain how this infinite banking thing can work for a family over 2 generations?

Well, you know what? Real easy to do that.

We have that right in our second book, Cash Follows the Leader. You can get a copy for free delivered right to your inbox. Head on over to cashfollows.com. That's cashfollows.com and pick up a copy right now.

What's really interesting about what you're sharing, Rohit, is obviously, I mean, for people, it's going to get them to think because you're talking about important thinking questions and just the The mindset of, oh, well, like the tax code can be my friend. A lot of people listening would be like, what do you mean by that? Like, that's— I've never even considered that that was possible. But it instantly changes the perspective. And when you look at the exact same information through a new set of eyeballs, like your brain is now open and aware and interested. So I really love how you frame that. And I think that that's probably one of the reasons why people love talking to you. They're going to get that perspective that they're not getting from their other experts or people around them. And often, and I'm sure you've discovered this in your conversations with business owners, they, they might complain about their CPA, they might like them, they might be a wonderful person, they know they're doing a good job, but they're only getting fed the bill pay at the end of the year. And it's already 3, 6, 8 months later when they're dealing with it and they've got financial statements that are in the past, but they're trying to make proactive, life-changing, major business decisions now for the future. But they've got no roadmap or visualization. And by the time they're getting the past data, it's already too late to do anything actionable about it. Like, how common is that in the conversations that you have with people you see?

It's the most common part of the conversation because understanding— so if you're an entrepreneur, you're developing a skill set. If you're a business owner, because some people inherit businesses or buy entire businesses and take them over and do very well. So I don't want to only champion the entrepreneur, but I firmly believe in one of my operating systems, in kind of the lattice work of beliefs I have, is that taxes are an asset class unto themselves. If we're willing to plan for how much equities we have, or plan for retirement, or plan for income, and net worth is not a proxy for income, taxes should be part of planning. It requires a lot of self-advocacy. I think that's the nature of your question. And so what you need to do is right now, September, October timeframe, is be sitting down and saying, are there things I can because I've had a good year, an above-average year, to keep more of what I, what I make. And so yeah, that's exactly right, Richard, is this takes some proactive planning, but it's really just about— you said the words we use. I believe the words we use determine our wealth. If you say I want more income, you're going to end up okay. But if you say I want more cash flow, the world is yours and everything in it. Back to our distinction about all income is taxable, not all cash flow is taxable. So yeah, entrepreneurs need to be You used the word mindset in, in the preface of the question. Need to have the right mindset to say this is a game. When you gamify building and running your business, and when you gamify taxes as part of your planning, we see miracles happen with our clients. And I don't just mean financially. I'm on a roll, but I want to finish one more comment.

Yeah, yeah, go ahead.

And I—

you didn't even ask me this question, but you know that we, we get this awesome sense of, of efficacy and satiety in our, in our business when a client calls us and says, hey, thanks for the $600,000 deduction. But what ended up happening, now that we're kind of 5 years into this, our business is shifting culturally. And I know, Jason, you're— we've talked, you've mentored our business, so thank you for that. You talk a lot about culture, right?

Oh yeah.

What's happening now is the calls we're getting aren't about the size of the deduction. The calls we're getting are, look, I had an offer to sell this business, it wasn't what I wanted. It's so cool, Mark. It's so cool, Ro, that I have a 7-figure pension on the back end. We're actually— we thought we were selling tax deductions and pensions. What ends up happening is our business and our clients who get it know there's a pot of gold on the back end, back end, even if they don't sell their business for the amount they want. Jason, think of the peace of mind that gives somebody. It makes them a better operator. It makes them more present in their business. This is a new insight into our business in the last 6 months, and that's my new favorite part about my day job. And I got the best job in the world. So.

It also gives them a higher negotiating capacity and presence of mind when an offer comes in or when they make the decision that they want to start preparing the business for sale. Their thought process on what they need to get or want to get for it might shift as well. So like they're in an enviable position. So sure, you want to get the maximum out of your business, your asset, your baby, everybody does. But it's like, wow, if I already have another business essentially or stream, a pot of gold that I've built because of how I've leveraged and utilized income and the flow of financial energy strategically for the last decade. Well, now, so what if I, what if I don't get, you know, $18 million for my business? I only get $17 million. I only get $16 million, but I already have this giant pot over here. So everything's gonna be square and I can, I can speed the transaction to closure to move on to the next stage of my life. So like dollars and value, you know, our brain processes numbers and a value, But what it's difficult or generally has a difficult time processing is what is that reference point of that value to my time, effort, and energy? You know, so now you can start to make decisions about, well, what does this actually mean to me? And what's the advantage if I can do it faster, quicker, easier with less overall effort and, you know, sorting out the mechanics of how the transaction is gonna go? I think that's an empowering thing on its own if people are present of mind.

Yeah, saying that's what we're learning is— it's back to your guys' favorite word— is, is control. That's a form of control. Taking control of your liquidity, taking control of your taxes is, is where we come in and specialize for small business owners, because it's a lever like any other that you can pull in a P&L. Really think of it. I think the best operators I know— and I'm fortunate to have a professional CEO running my business so I can do this, right? I can't operate a business, gentlemen, so let's just be clear on that. I think the visionary types can't do that. We look at our business as a series of knobs and dials, and we just think of taxes as one of them, that's all. And when we need to torque up the deductions, we do one thing. When we don't need them because it's a different kind of structure, or we had a big capital outlay, we do different things. It's just another dial or lever. And so we should talk about how to pull it, but that's how we think about it. Very similarly, Richard, in that it's back to this word of control. People behave differently when they have control.

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When I think of, you know, cash balance plans, they can create substantial deductions for the right owner. So who, who is the ideal candidate and who should steer clear? Like, do you have that sort of distinction?

Absolutely. And I think good— and my, my desire is always to teach and educate, so there's no question that's off limits. Ask me anything. Ask me anything about my IP, because teachers don't care about that, right? So here we go. Who is it for? Who doesn't it shoot for? Who doesn't it work for? Let's actually start with some of the most important questions. The question you should ask yourself is, am I consistently paying quarterly estimated taxes? Okay, you're probably beginning to think this is for you. By no means is it for you, but that's the first question, right? Have you had a consistent tax liability? So even if you're not paying quarterly estimated, but to, to Richard's point, you— the CPA is backward looking and trying to figure it out. Look, everyone dreads the same 2 days: the day your CPA calls you to tell you what you owe, and the day you get your annual physical to see how much weight you gained. Right. And so, and so if you are in that camp where you're constantly surprised by your tax bill, this is— this dialogue, you know, tune in even closer to what we're going to talk about today. Okay. Okay. Who does it work for was the first half of the question. In the U.S. tax code, there's 2 entirely different and separate retirement systems. Everyone's familiar with the 401 and the IRA system. There's an entire secondary system called the 401 system. You know, they're very similar because they start with the same letters— 401 numbers— 401. If I said letters, right? 401 and 401, and they switch the letters to A and K. So that means they're similar, related, but a little bit different, that they occupy different sections of the tax code. Who is this for, Jason? You get to unlock the power, the opportunity to explore a 401 If you have active self-employed income. That's the broad— now we'll go specific by entity type, and I'll give everybody exactly what to look for. I can tell you which line on which, which tax document to look at to see if you qualify. But that's the broad heuristic. If you are self-employed or earning a self-employed income, you get to unlock both retirement codes simultaneously. They are not mutually exclusive either. A lot of people believe that. That's who it's for. Let's stop there for questions, then we'll get to who it doesn't work for. But Fire away with questions on that.

In our experience, I'm going into my 19th year of dealing with business owners from all walks of experience. And a strategy can be mathematically tax-efficient, but practically terrible for the person using it. I always find it helpful just to share, okay, if you If you are on this track, this is something that makes perfect business sense for you to be looking at. If you're not quite there, it's maybe just not yet. Or if you're the type of business owner that perhaps maybe strips a lot away from the business and doesn't maybe have the long-range the long-range vision, it, uh, it may not be a good idea too.

Yeah, we're sort of naturally going to where it's not a good idea. So let's go back to where, where it does fit, because you're right, where it does fit— I loved your comment. I absolutely loved your comment that, that there are some things that look good as deductions but may not be mathematically efficient. I've written about this topic, but I didn't say it as eloquently as you did, Jason. But There are good deductions and there are bad deductions. A deduction, if you have a 1-year spike in your income and you need a rapid deduction, certainly. That's not proactive long-range planning, right? Because then in years 2 through 5, you're still paying for that vehicle and not getting nearly as big of a deduction. You are in effect buying a liability.

Right.

Right. The cash balance world, the pension world, is a good deduction because you are buying an asset. Right, that's it. You said it much more eloquently, so I'm just reframing your language of something may look good mathematically on paper, but if you design your business to constantly buy liabilities, good luck, you're not going to be in business all that long, right?

Precisely.

You design your business in your life, right? You design your business and a life to say, I'm going to take— I'm going to use deductions to buy assets. Now we should talk about which assets are the best kind, and we talk about control and income and cash flow, right? We're gonna— that's where this is headed, is going. But so let's go about who it's still for, and then we had a lot of comments on who doesn't For. Okay, if you own your own LLC and box 14 on your K-1 in the US is checked off, it's active. So if I just formed an LLC, if Jason and I formed an LLC and we bought some mineral rights in Texas, we would get a K-1, but it's not active income. But people, people say, how do I know? Pull up your last K-1 and see if box 14 is checked off. Congratulations, you've unlocked the dialogue about 401.

That's it.

Oh good, it's that simple, guys. Yeah, S corps. Now let's go to S corps now. So S corp, Subchapter S, is a type of election for, for, for an LLC. The minute you elect S corp, you've created active income because you get a W-2 and a K-1. So what I don't want people to do is say, I have an S corp, I looked at my K-1 and box 14 isn't checked off. It won't be in an S corp because you're getting active income in form of your W-2. Your 1040 is opening 401. Great. And then if you get a Schedule C— so in the US there's 1099 income, you get a 1099-INT for interest, you get a 1099-R when you liquidate an IRA, you get a Schedule C when it's active income. So think about, um, an independent consultant who has— didn't form an LLC, but in the US you didn't form an LLC but you're getting paid to do consulting work, you get a Schedule C, you've opened up 401. That's it. That's all it takes, guys. That's really that. We're overcomplicating. So that's who it's— that's who can unlock it. Okay, now the dialogue. You've asked me twice and I've been cheeky about the answer. Who doesn't it work for? Okay.

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I don't think there's anybody who's realistic about their career who says, I'm going to go work somewhere for 2 years and get a pension. Right. You typically have to work somewhere 10 or 20 years. Right. It's a long-term commitment. You talk about long-range thinking, right? Play long-term games with long-term people. I would challenge people to think the same way about the US pension system. It's interesting I'm calling the kettle black because you guys talk about long-range planning all the time because we love life insurance, right? It just gets better every year, right? Increasing returns to a factor. It's autocatalytic wealth. It's phenomenal, right? Well, the pension's the same way. A pension is going to be— think about doing it for a while. The longer, the better, but we prefer to see it for at least 3 years.

Okay.

So that's, that's who it— who— so who it doesn't work for is someone who can't commit to something for at least 3 years. People think they want to commit to it, but what's interesting about it is this idea that you can't have really episodic revenue. Believe it or not, we say no to about 3 out of 10 people who come to us because— here's a case. We got a call a couple weeks ago. Ro, really want a pension. I'm a real estate agent. I was like, all right, tell me about you, your situation. He's like, I moved 2 huge luxury properties in Q4. I got a big tax bill, had my best year ever. And I go, great, how's this year going? He goes, living off a HELOC. And I go, okay, let's, let's, let's pump the brakes here. Okay. Because you don't start—

Living off the HELOC.

Right. I was laughing because I was like, look, love the enthusiasm. Love that you're doing your homework. Like, right. But if you have really episodic revenue, you can't realistically make a 3-year commitment to a pension. So that's what I mean, who it doesn't work for. So someone who's highly— has highly episodic revenue, it typically doesn't fit well. That's, that's kind of the major exception. And then if you're really, really young, it can work, but it's not as effective. The sweet spot is 45 to 65. Okay, a 45 to 65-year-old business owner can oftentimes contribute and deduct as much as their current salary.

That's really—

yeah.

And so obviously there's, uh, so Income consistency, cash flow consistency of business revenues is really what you're talking about. And then I just want to circle back, you know, to the 3-year kind of increment. Like, you're giving a realistic minimum, but you also highly quantified before you said that, like, longer is better, which is just like it is for paying premium in a whole life policy. Just because you might be able to pay it for a short amount of years doesn't mean that that policy is going to be overly efficient. So Sometimes we get business owners or people that come into us and it's not just any people, they're in their mid to late 60s or even, you know, beyond. And they're like, hey, I've heard, watched a bunch of videos and I've heard this thing is the greatest thing since sliced bread. Can I just dump a chunk of money in here? And they always use the word dump. I don't know why. I don't think that that is the best vernacular to use in a lot of situations.

Nice image.

Just my opinion.

But keep it PG, gentlemen.

Because that's what we, they see on all the YouTube videos online. So they're gonna, Like, can I just do this and it's gonna magically solve all my problems like a magic pill? Because it sounds great based on the cadence of all the videos, but they miss out on the detail parts. Like, no, this is a commitment. There's a minimum premium, there's requirements, it goes for a while, like that sort of thing. So I think you're saying, yeah, it's feasible, it's possible to do it in 3 years. However, you know, you should really target 5 at a minimum. You could do it in 3, but you should probably target 5 and you should probably target longer. But like, 3 is possible, but like, I'm guessing that's in a smaller group of circumstances and it's relative to how much a person can shove in. Like, and then there's also just like age timing would be the other impact. Am I on track there?

You are. This is super dense topic. So here's what I'm going to do with your permission is I'm going to step out and explain the entire pension system in 2.5 to 3 minutes and then remind me, Richard, to come back to that because I actually think a 3-year plan for a 65-year-old is pure gold and that won't make sense until I explain the whole system.