Save on your taxes in 2023: A discussion with MY CPA

We're paying taxes at levels that are efficient and ultimately, over the entire life cycle of our enterprise or what we're trying to accomplish, we are as efficient as possible. Personally, I have a niche market where I work with syndicators, so. Similar to you, sir. Exactly. I've got probably. Probably managed somewhere in the ballpark of 350 to 400 syndicated tax returns at this point, but really love the ability to work with syndicators from inception to completion. So, you know, be instrumental in what they're doing. Work with them on structuring on business plans, on things of that nature. Really, again, going towards just being as efficient as possible and being as proactive as possible. Outside of that. I'm a cyclist, I'm a snowboarder. I like the outdoors.

And you like oysters. We went to oysters when you came to visit.

I do enjoy oysters.

Awesome. Cool. Well, thank you for that intro. All right, you ready to jump in, everyone? I'm excited. All right, so, Tim, I'd like each of us to talk about. Well, you're the expert, so basically you and I'll give my input on the top three ways that, you know, when you meet someone and you're going to be a client, they're going to be a client of yours. Like the top three things that you're like, hey, are you doing this, this and that. Like the top three suggestions to make sure it's like, hey, this is easy. Almost anyone could do this. I focus in one area. But what are the kind of top three things immediately suggest?

I mean, ultimately it's different for every person. So it just really depends, you know, when, when someone comes to provision, we look at where you've been and where you are today. And so ultimately we look at what you've been doing to see, hey, you know, what is it that you've been doing? What have you been utilizing the tax law? Where are you today from a structuring standpoint? So one of the easiest things is, are you using the right entities? Are you taxed as the right, you know, as the right taxable entity? Looking at, you know, those type of things. Look at low hanging fruit. Look at, you know, if you operate a business, are you taking all the deductions that are available to you from a business standpoint, if you have a family, are you employing your children, Are you employing your children as employees, Are you utilizing Roth IRAs to get money into, you know, into retirement plans for them at a young age? You know, really just kind of looking at all of that and Then making sure today we're as efficient as possible and making the moves that we can. And then from that point it's really moving forward. It's what do you want to do? Because that's the most important for me. You know, I can tell you what to do, but if you're not comfortable doing that, it's not going to make any sense. So it's really just looking at what do you enjoy, do you enjoy real estate? Okay, well, what, what is your involvement in real estate? Do you want to be an LP investor? Do you want to be a flipper? Do you want to be a developer? What does that look like? And let's make sure that we've got all the deductions and, and things in, you know, in, in line in that regard. Are you a W2 employee? And as such you are, you know, essentially the, the fuel. That machine, you know, that that fuels the machine. That is the US Government. And if that's the case, then what can we do in that regard? And what advantageous investments are there? Is it oil and gas? You know, do you have a spouse that we could potentially bring into the fold and do something from a business standpoint to give you deductions that offset your W2? So it's. I know it's a horrible answer to your question, but you know, ultimately, if I am looking at a client and they're a client of provision or came to provision, chances are they're not stock market investors, they're not traditional investors. They're looking at alternative investments. So, you know, really, real estate in any way, shape or form, oil and gas and then various other alternative investments that might give some tax benefits. Today, it's the Inflation Reduction act and the energy efficient credits that came out of that, that has become a huge item of discussion.

Yeah, I love it. So if you guys just kind of. In summary, Tim, the top three ways, entity structure, what deductions are you taking with your family, etc. And investments. And so entity structure is kind of over my head. I rely on other people for that. Investments. That's my space. So then, okay, so there's the top three investments and then the top three investments. Well, I know of two. So you said real estate. And we'll go into how that can work for people. And then oil and gas. And then is there a third alternate investment category that's getting really great tax deductions right now?

Anything carbon related. So carbon capture has become a huge thing. You know, the Inflation Reduction act that was passed in August was 100% focused on clean energy. So there's a lot of opportunity there. There's, there's a lot more open in that regard because prior to the ira, our credits were being limited and they were declining. And on top of that, we couldn't transfer the credits. The IRA allowed us to ultimately sell our credits. So now it's a whole new opportunity where, hey, we can invest in something and maybe we can't use the credits, we can sell them to someone else that can. So that's created a huge new sector of opportunity for people to be able to utilize this as kind of a income arbitrage. If I'm in a low tax bracket or I can't use that credit itself to someone that's in a high tax bracket and we both win.

Can you do that as well with the oil and gas? The benefits you get from that? All right, okay, so that's really interesting. That's one that I didn't know about and I haven't explored. So that's really cool. Let's talk about oil and gas. So, you know, a lot of oil and gas investments say, hey, you get 75 to 100% tax deduction in year one. And so people go, oh, that sounds great. Can you kind of give us the background of why there's a tax advantage to oil and gas and then how, let's go into how people can use it.

Big business. That's how ultimately it was. It was, it was lobbyists. So in 1986, the tax law introduced code section 469, which is passive activity Loss rules said any activity that you're passive in can only offset passive income. So what they're trying to get away from is prior to 1986, you invested in a multifamily and you had a million dollar loss in it. You could offset your W2 income. You didn't even have to be active in it because there was no distinction between the two. So in 86 they created this passive activity loss rules. And as part of that tax code, they created a carve out for oil and gas. Lobbyists did a really good job of being able to create this position. And what it ultimately ended up doing was it gave this carve out. That said, if it's an oil and gas working interest and you invest in a way that does not limit your liability, you can take the losses from those investments against ordinary income. And in most cases, what you're seeing is when they say 75 to 80%, these are traditional vertical wells or fracking wells, where they're doing intangible drilling costs. So ultimately have an opportunity to write off the cost of drilling prior to that drilling started. So that's what you're seeing. And that can offset ordinary income up to an extent.

And what is that extent?

The 2017 Tax act created something called excess business loss rules. And so that caps the amount of deduction from flow through businesses that can offset W2 income, pension distributions or IRA distributions, and any portfolio income. So capital gains from equities, things of that nature. It started at $500,000. It has grown, it will continue to grow, index for inflation. So I think it's about 580,000 this year if you're a married couple, and half of that if you're single.

Okay. All right, excellent. So let's review again, because this is the question I get a lot is wait, so what can, what can it offset? Just my W2 income. And you're saying it can be W2 income? It can be distributions from a retirement account.

Yep, yep. Interest, dividends, capital gains, any of that. Up to 568 or 580, depending on what year you're looking at.

Okay. And in addition, the income that you would get from that oil and gas investment.

Yes. So it, it's considered flow through. So there's different sectors. Flow through income is anything that you, you know, if you have a schedule C and sole practitioner business, you've got a rental property on your personal return, you've got a partnership, an S corporation. Those are all defined as pass through businesses. And so the losses from oil and gas can offset pass through income indefinitely. So if you've got a business that has a million dollars of profit, you can have a million dollar loss from oil and gas and they would offset each other. It's just when you get outside of that what they call pass through sector and you get into the W2s, the IRAs, the portfolio income, that's what's caps. So one of the structures that we utilize a lot with this is looking at Roth conversions. Someone's got half a million dollars in a traditional ira. Well, let's get it converted to Roth now if we can, and use the oil and gas investment up to half a million dollars to offset that. So now we've got a Roth that is now tax free forever, and we've paid no tax on that conversion.

Yeah, there you go. Awesome. On this note, David is asking if you make more than the 580k at the W2, can you, can you take more than that as a deduction? I think the answer Is no. So sorry, David. I wish. Yes. Is there anything you can do with entity structures to help with that piece of it?

No. I mean, if any business that you have is going to be designed or is ultimately going to be considered a flow through entity, so you're going to be in a good position in that regard. If it's an S corporation or partnership, what it really comes down to is looking at, looking at the calculation, looking at salary you're paying yourself. If you are the business owner.

Yes. It's just.

Ultimately, you know, it gets to looking at what can we do to minimize salary, reasonable salary. We've also got another little caveat. 2017, that's called the qualified business income deduction. That is based on salary that you pay out of the business. So it's all these working pieces that come together. But if you, you know, I have a lot of clients, I have a client that works at Google, makes, you know, a million dollars W2 and wife, prior to 2017, we could, you know, knock out all of their tax liability with real estate. After the, after 2017, now we're limited to, you know, it was a half a million dollars after that. So.

Yeah. And then, then I see another question on that. If you invest in oil and gas, since you're talking about the Roth conversions, if you invest in oil and gas and it's not leveraged and you use your IRA or solo K to invest in it will be. Will you be subject to ubit and the one that I'm currently in, they suggested don't use your IRA or your 401k in order to invest in oil and gas. You're shaking your head. Why don't you elaborate on.

I mean, you can if you want to, but. So UBIT is just unrelated business income tax or, you know, a lot of times people say ubti, which is unrelated business taxable income. And what that is is that taxable income is anything that's not related to the purpose of that exempt organization. So this falls in for charities, for retirement accounts, whatever it might be. But the definition of a retirement account is an investment vehicle. And so if you are investing in things that would be considered investments, so stocks, bonds, you know, equities, things of that nature. It's not subject to unrelated business taxable income. If you invest in a business through your ira, all of the income that comes out of that is considered to be taxable income taxed at the highest tax rate. Oil and gas falls under that. So if you do invest in oil and gas in an IRA you just have to be aware that any of that income that comes back to you in the IRA is going to be taxed at once it gets above $12,500, it's 37%.

Okay, cool. That's good to know. Yeah. So I guess that's why it's suggested not to do that. But Todd, I think you're the one that asked the question. So Tim was really saying use it not as an investment of the ira, but as a rolling into a Roth. You would be taxed at that time, and so use an oil and gas investment in order to offset the tax of that conversion. Okay. All right, cool. Awesome. Okay, so let. I'm trying to make sure we're answering all the questions in the chat. There's quite a few. Feel free to grab any that you see that are relevant to what you were just saying, Tim. You might have gotten most of them. Oh, here's a good one from Jim. If you file jointly with a spouse, will this investment deduct their AGI as well?

Yes. So ultimately, since you are filing jointly, all of your income comes together. So if you know one spouse has a W2 of a half a million dollars and the other one has a loss from oil and yes, of half a million dollars, they'll marry together and ultimately offset each other.

Perfect. So if there's a Mark and Jane, and Mark makes no money and he invests in the oil and gas in his name, Jane makes 500. It doesn't matter that Jane makes the money and the investments in Mark's name?

Nope, not at all.

That's great because a lot of people ask me that and they're like, oh, no, I signed the paperwork and my name, it needs to be in my spouse's name. Doesn't matter as long as you're filing jointly with your taxes.

Correct.

All right, great to know. Cool. This is a sad one. This is from Steve. Steve, I think this is very sad when I hear this. Someone who exited a business and they already paid the capital gains. If you are on here and you're going to sell a business or you're going to sell a property and you're going to have over a million dollars in profit coming to you, please get in touch with me. Tim probably knows this as well, but we have a team member we work with so that you can exit and not pay the capital gains and then redeploy that into investments that you prefer. So it's not a 1031 exchange, it's another vehicle. But it makes me so sad. When people are like, oh, you know, I sold my business, I made 200, but I paid for it. I made 2 million, but I paid, you know, half a million million dollars in tax, depending on where you live. And now I'm left with so much less to invest. Instead, there's vehicles you can go into and you don't have to pay the capital gains tax, and then you can choose investments to go into. But if you already pay the capital gains, and I'm assuming it was last year, than in 2022, Tim, is there anything they can do in 2023?

Depends on when the sale was. I mean, you could get into a qualified opportunity fund and defer that gain. Now that horizon is becoming less and less because you've got to recognize that gain in 2026. But ultimately the. The stipulation is you've got to reinvest that capital gain within six months of the recognition of that capital gain. So if your business sold November 30th, you've got until, I think April 30th this year to invest in it. Sorry, May 30th, first. But ultimately that's an opportunity. But in most cases, once it's done, there's, you know, from a reactive standpoint, that's really the only opportunity have. But if you sold something January of this year, you've got 12 months to plan for it. So it's a huge opportunity to be able to utilize that and at least offset what you can through reinvestment through, you know, other deductions and things of that nature.

Yeah. Awesome. All right, another question. Can you invest in working interest through an LLC and still claim the intangible drilling cost as a deduction on your personal taxes?

You can. It will be passive, so it will not be active. It will not offset active income. So W2 income, one of the requirements in, you know, in order to get that carve out is you have to invest through an entity that does not limit your liability in any way, shape or form. And it specifically calls out LLCs in the tax code as something that limits liability at the state level. Because that's what an LLC does is it limits liability through the statute of the state that it was organized in. So it has to be in your personal name or in a revocable living trust or through another general partnership that doesn't limit your liability.

Yeah, that's really important to know because, you know, and maybe we should back up and talk about it, the difference between ordinary income and passive income, and those two buckets, because if there are folks on here and they are real estate investors and they don't have W2. They don't have an ordinary, a large, ordinary income bucket. If their passive income bucket is where they get most of their income and they wanted to use an oil and gas investment to offset this bucket of income, you're saying they should then use an llc. Does it have to be the same LLC that they hold their real estate in in order to invest?

No, no, it can be anything. But ultimately, yeah, I mean, that's the, that's the holy grail. That's the. I've got all this passive income that I need to offset because it's very easy to do and you don't have to kind of adhere to these, you know, to these boxes to make it work. So in that circumstance, they can invest in oil and gas and anything that they want because they, whether it's active or passive, it's always going to offset that passive income.

I hope that helps, Kevin. Now, this one is important. It's not really about the structure and the tax advantage, Tim, but you know, you see the results of the investment. So I have a question. There's a question like, hey, but what about the oil and gas investments going south? Like, you know, what if, what, what are the chances that it's going to be a bad investment? So I invest 100k, I get my tax deduction, but then I don't really get good returns on my investment. You know, you've been seeing this for a long time. So have there been ebbs and flows? And have you seen that this is a good time people have been getting the expected or strong returns on those oil and gas investments?

Yeah, I mean, I think there's a lot of things no different than a syndicator that go into it. You know, then in, in a multi family, you've got to look at the operator and the operator themselves and what they're doing, you know, how they're mitigating risks. I've had a lot of clients in the, in the last, you know, five, seven, 10 years that have done things for high risk, high reward and ultimately, you know, they invested in one well that became, you know, came up dry. Well, they lost their entire investment or they invested in three wells and two of them came up dry. And so they only, you know, really have one well that's producing. So really looking at what the investment is, looking at what the, you know, for lack of a better term, pipeline of revenue is, and then how are they mitigating and how are they as an Operator, I've seen, I mean I've been doing this and you know, and looking at oil and gas investments for 15 years now. And some are great, some are bad. Unfortunately, you know, it does matter because a lot of it is based on the price of oil or price of gas. So you've got to look at what the trend is and look at things like break even, look at what the break even dollar amount is and see, you know, is that attainable? What's the track record? What, what does it look like? But ultimately I can't give you an answer of it's been great, it's been horrible. The last 12 months has been, you know, in, in LNG has been fantastic. But you know, it shot up to eight or nine and now it's back down to two and a half. So it just depends on what the market is and what the market brings.

And I think that's a perfect answer because a lot of people, you know, in our offerings, they bring it to their CPA or their attorn the investments. And some people are like, yeah, you should do this. We've seen some really strong returns with our other clients and other people say don't do this. We've seen a lot of really bad things. And you know, when you ask a little bit further, it's kind of like what you said, is the investment diversified and what's the track record? So it's similar to real estate where you know, you have to look at the track record of the operator in any passive investment. So what have they done over the last couple of years given what's going on in the economy and what have they done before that as far as the returns for investors? And then also the second thing is diversifying. So like you said, if it's one well and it comes up dry like yeah, you're, you're at risk if you're investing in one thing. And so I see that being very similar to real estate. If you invest in one single family home as a rental and you know, it turns out bad for some reason the market's not what you thought it was, or you get a non paying tenant in there, you know that you're, you're riskier if you have one single family home investment versus if you're in, you know, you have a 400 unit apartment complex, you might have some bad tenants, yada yada, you're diversified so it can lower your risk. So I can kind of compare that in oil and gas if you're in some sort of fund and the Fund is diversified across maybe 20, maybe 200 different sites and it's a large fund, then that risk of oil and gas coming up dry would be theoretically reduced if it's in a fund model.

Exactly. Yeah. I mean, everything's about diversification and not specifically different. Everyone talks about diversification, mitigation of risk, and in the traditional term, the financial analyst will tell you, diversify across all these sectors. Where, you know, if you love real estate, focus on real estate and diversify by utilizing, you know, scale. Same in oil and gas. If you, if you want to invest in oil and gas and you think it's a good idea, look at scale, don't look. I mean, unless you're, you know, unless you're a risk taker and you want to take the risk of losing everything you have, diversification in that regard is, is good.

You want to risk everything you have.

I've seen it, unfortunately. I've seen, I've seen people with millions of dollars into wells that have come up dry and it's, it's, it's hard. But you know, there's a lot of operators out there that are looking more inward than outward and looking at what they're going to benefit from and not what the investors are.

So I hear that. Yeah, that's part of the due diligence on the operators, right?

Yep.

Okay, so we're gonna spend a little bit more time on the energy because I see there's 20 other questions I've been gotten to. So this is from Stuart. If you have mineral rights income from Oklahoma but live in North Carolina, can you file for a refund of the taxes that Oklahoma withholds from the mineral rights income? Pretty detailed.

I mean, technically, yes. So states have treaties, for lack of a better term, treaties with each other where you don't get double taxed on the same income. So typically you'll get taxed in the highest jurisdiction. So if you live in California and you have income in, you know, in, in Arizona that's at two and a half percent, you're always going to pay California income tax and California is going to give you a credit for the supposed tax that you would have paid to, you know, to Arizona. So same thing with North Carolina, Oklahoma, it's going to be one state's going to give you a credit for the taxes you paid in the other state. And it really just comes down to the highest tax jurisdiction is what you're going to pay tax on.

Got it. Question about the pension. 1099 pension income, is that considered ordinary income that can be offset by the oil, Gas.

Yes.

That'S from Terry. Are there other passive investments that offer significant deductions against ordinary income? The Tim talked about oil and gas, the carbon capture from the IRA last August, you said. Is there anything else?

Not really. Unfortunately, in ordinary income, 2017 tax act really got rid of any deductions that you could take against ordinary income. Got rid of unemployment, unreimbursed employee expenses, got rid of investment expenses, got minimized the amount of state tax or taxes that you could deduct against ordinary income, limited mortgage interest. So unfortunately, it really limited the amount of deductibility. And so you've got to look at investments like oil and gas and then, you know, other. Other investments that generate credits like solar, you know, putting solar in your house and things of that nature.

I see a couple more questions about the conversion to Roth and how to use that. Can you explain that process? Again?

So it's utilizing outside money to convert inside money. So if you've got, you know, half a million dollars, let's say you've got. No, you know, I've got a client that we utilize this strategy for, like, I think the last five years. But ultimately, what we looked at was where he was in his tax rates and what he had in his traditional IRAs to convert. So every year he was looking at, I've got X and I've got Y coming in from outside investments. If I reinvest Y in oil and gas, how much will I be able to offset and what will that look like from a tax rate standpoint? And so we kind of modeled it to make sure that we were taking advantage of the, you know, all the standard deductions or itemized deductions, taking advantage of the 10% tax credit or 10% tax rate, the 12% tax rate, and then really cap him at about the 22%. So that ultimately he was paying very low tax on the conversion and he was offsetting all the additional. So it really is just a function of, I've got half a million dollars in my ira, I want to convert to a Roth, so I don't have to worry about paying tax on that in the future. How much money do I have outside to be able to utilize to offset that?

Thank you. I hope that helped. Todd, Brian is asking same treatment. If you invest as joint owners with spouse as opposed to investing individually. I believe the answer is yes. If you file jointly.

If you file jointly, yeah.

Okay. Now, if you file separately, but you invest in the investment jointly, then does it just split 50. 50. The, the tax advantage between the two.

Depends on the state.

Oh.

If you're in a community property state like California or Arizona, you are, hypothetically speaking, in a, in a community property state like Arizona or California or, you know, pretty much all on the west side of the United States and Florida, you are supposed to split income 50, 50, even if you file separately. In non community property states, equitable distribution states, you can ultimately, if you file separately, technically, the money, you know, the, the income that is sourced to you is picked up on your return, and the income that is sourced to your spouse is picked up on their return. So you don't split those. Now, if you were to file jointly or invest jointly and file a separate tax return, you'd probably have to figure out a way to get two K1s, because K1s are sourced to Social Security numbers, and you can't have two Social Security numbers on 1k1.

Oh, got it. Right. Okay. I hope that helps. Brian, this is back to Steve, who was talking about his business that he sold. He says he has not paid the taxes yet, but he sold the business in September. Do you think it's worth him reaching out to you to have a direct conversation? Is there anything to be done?

Yeah, I mean, ultimately his goal now would be to see if it made sense to even invest in a qualified opportunity fund. And if that was an opportunity. Used the word twice, but an opportunity for him, then ultimately it would be something that he would really have to. I mean, he's got. If it was in September, he's got a month to invest, so it might be a little too late for him just simply to do due diligence and make sure he's making a sound investment.

But I guess, Steve, if you have already done due diligence on some options, then I think it's. Which I think he has. I'll say, because we've been talking, so it might, I mean, you might still have time. So I'd say yeah. Get in touch and see what you can do. Steve. Lynn, passive loss deductions can cover the taxes due for a traditional IRA to a Roth IRA conversion. Correct. That's what we were talking about. No, that's not correct.

No.

Oh, not passive. The. The oil and gas loss deduction.

Yes.

So not real estate loss deductions, but the oil and gas loss deductions can cover the taxes due for IRA to Roth IRA conversion.

Correct. Cool.

Terry's asking what's the number where it makes sense to contact you for lowering the capital gains from the sale of business or piece of real estate. So for business, Terry, a million or more. For real estate, it's anything. So we can. If you sell a piece of real estate and you have $100,000 or you have $2 million, we set up our, our syndications so that you can 1031 exchange into them. It's called a 1031 E. And so, you know, the only thing is the timing of it, making sure we have something open. But if you're selling this for anyone on here, if you're selling real estate and you want to 1031 exchange to not pay capital gains, but you want to go into a passive real estate investment, so you want to stay in real estate, you don't want to pay the capital gains and you want to go use that to go into a syndication, reach out to me, because we can. If you have $100,000 or more to invest, you can do a 1031 E and you can join one of our investments. I hope that helps, Terry. And then for business, that's not directly me, but it's someone I know. So a million or more, and then you can use it. You can sell your business, not pay capital gains tax, and then you can invest in syndications and oil and gas. You can basically split it up however you want. All right, here's something that's totally new to me. Can we defer taxes on RSUs, sell the RSUs and invest in oil and gas and take deductions from this against taxes owed for the RSUs?

I don't know. I would have to look at the. That's a. That's a pretty, you know, long string of events. So I don't. I would have to look at it and look at how it was treated and what it looked like through the entire process. But probably I don't have an answer. Sorry.

Okay, cool. So I see some more questions about, hey, how do you 1031 exchange? So if you have over 100,000 of real estate that you're selling and you want to 1031 exchange it, reach out to me and I'll talk you through that process directly because we're not really the focus today. Question from Richard, which I got this one a lot, Tim. If I'm selling a rental, that will create a large capital gain tax, can the oil and gas investment offset the capital gains and reduce these taxes?

Yes. So if you invest in oil and gas through as a general partner, so without limit of liability, it will be an ordinary loss, and the ordinary loss will offset any income that you have, you know, now again, you have limitations for W2 income, IRA distributions and traditional portfolio income. So you sell a share of stock and you get a capital gains. The limitations there. But if you are selling a rental property that is considered a flow through business, so it's on your, you know, schedule E on your personal return, the capital gains from that is considered flow through and as such can be offset by those losses indefinitely.

All right, so the list of attendees is so long I can't see. But Troy or Kim, if you are in here because they're asking me that I'm selling a Property, should I 1031 exchange into an apartment building with you or invest in this? And so you're basically saying either can work. It depends on the preference.

Yeah, yeah. I mean things are, you know, the market has shifted. You know, if you talked to me a year ago, I would said, you know, if you love real estate, do real estate. There's no reason not to because we can just offset that gain with the losses from bonus depreciation. 2023, we've seen a limitation. We're down to 80% bonus depreciation. Still, you're probably looking somewhere in the ballpark of about 82 to 83% after you get the other depreciation added on top. But like you had stated earlier, that market has shifted and now debt has shifted. So now instead of using bridge financing, which everyone was using, everyone's going to long term fixed rate debt with lower leverage. So now we've got two factors that are pushing down the amount of deductions that we have. So you know, if you're looking to offset 100% of your income, real estate might not do that anymore, you know, dollar for dollar. So oil, gas, oil and gas might be a great investment to, to utilize for that purpose.

Awesome. Then there's some questions in here about recapture. And I also got a lot of questions like this around recapture. So a lot of people are familiar with when you take bonus depreciation, there's a recapture at the exit because you lower your basis. Is it similar with oil and gas? Is there a recapture?

I mean ultimately it depends on what you're getting into. But intangible drilling costs are just the costs that are. You're allowed to deduct a upfront. So they're not something that you're going to recapture but you ultimately have no basis in that investment anymore. So every dollar that comes out of that investment is going to be income. So it's not technically recapture but it ultimately is going to be Recaptured simply because you have no basis in that asset anymore. You know, something to be aware of and something that a lot of people don't talk about, just want to put that out there is these working interest in oil and gas are 100% subject to self employment tax. So in a situation where you invest in these, you get a loss and that loss offsets self employment income in the first year. But throughout the life of that investment, it is always going to be subject to self employment tax. So you've got to be cognizant and aware of that. You are going to ultimately pay self employment tax on that investment, which could be up to, you know, 15.3%.

Okay, all right, that's good to know. And can the. So in real estate, when you have bonus depreciation loss, it goes into a bucket and you can use that until it's empty. It doesn't have to be in the year you receive it. I can use it next year, I can use it next year, I can use it 10 years from now. I can use it until that bucket is empty. Now with the oil and gas, does it work the same way?

It does. So since it's ordinary and if we're investing as a, you know, to have it be ordinary income, we don't have any ordinary, you know, income to offset. It just becomes a net operating loss and net operating losses carry over indefinitely. So until you utilize it or you pass away.

So If I invest 500,000 with my spouse and we get that 100% write off, but we only make $200,000 this year, there's 300 that is kind of in the bank that we can use later.

Correct.

Cool. I hope that summarizes a lot of the questions that were here. I see a lot of questions that are asking for clarification still around the IRA to Roth. I would suggest go ahead and listen to the recording of this a couple times because Tim explained it twice. Just go ahead and listen to it so that we have time for other things. I guess this one specific thing from Mark, just making sure that conversion strategy that you stated, does it work in all states? Does it also work in California?

Yeah.

Okay.

Because that's federal. I mean, and California doesn't limit. California follows federal in that regard. But I can't speak specifics to all 50 states or, you know, all the states that attacks New Jersey, Pennsylvania, things like that have kind of oddball rules. But in most states it most states that follow. So a lot of states follow Fed. So the. They basically start with adjusted gross income at federal level, and then they do modifications, add backs and subtractions. Some states, like California, they don't follow Fed. They have their own calculations. So they do follow oil and gas rules. But some states might not. So that's something you definitely want to reach out to your accountant or CPA and make sure before you're doing this.

Let's see a question from Lawrence. Where can people go to invest in oil and gas? So, Lawrence, you can reach out to me. I'm not like presenting an investment on this webinar, but if you're interested, you can reach out to me and I can talk to you about that privately. All right, here's a good one. Are there any tax benefits in investing in multifamily syndication for an individual with ordinary income? Well, eventually, hopefully you'll get income from your multifamily syndication. So the tax benefits from your multifamily investment can offset the income you're going to get from that multifamily investment. Correct me if I'm wrong, Tim, but it can't do anything for your ordinary income.

Correct.

All right. Got it. Right.

I mean, yes. Yes. Let's just stop with yes.

Is there something really creative people can do?

No, I mean, if you have. So let's say you only have, you know, let's put this in a bubble. And so you have one, you know, passive investment. You've got a rental property that you bought 100% and it's a dog and you lose your shorts on the sale that in a year of sale. If that's the only activity that you have and you didn't group it with other passive activities that converts to ordinary income. So yes, if you sell something at a loss, it's passive activity.

You.

It will convert to ordinary loss and then ultimately be able to offset that. But I'm hoping that no one is doing that just for tax purposes because you lost a dollar to save 37 cents.

Yeah. Now there's better things you can do, correct? Dan. Hi, Dan. Good to see you in here. He's asking can you use passive multifamily bonus depreciation to offset taxes due from a 401k Roth coverage conversion?

Say that again.

Can you use passes, basically can use bonus depreciation from multifamily to offset taxes due from 401k Roth conversion?

No. Unless you're active in that. If you're a real estate professional, that would be the only way.

Okay, Dan, you may be a real estate professional. I can't remember. He may be. So if he is Then he could do that.

Correct. If he's a real estate professional. It converts rental real estate to active trader business.

Okay, there you go. A couple people asking about the recording. Yes. You can see there in the top right, top left hand corner, the recording button on. It'll be shared with everyone. Okay, I see some questions specific to. If you're interested, you can reach out to me, but I'm not presenting a specific investment. There are a lot of people who did invest in oil and gas investment with me already who have questions, which is why we originally wanted to have this. So. But if you're interested, you can reach out to me privately. All right, so this is going back to when we were talking about the top three ways in the beginning, Tim. And there was investments, entity structure, deductions. So this question's about deductions. Can you discuss the ability to take deductions for things like books, home, office costs, passive real estate, syndication versus oil and gas investment?

Ultimately, if you've got a trader business and it's ordinary and necessary, you can take a deduction. So you've got to look at, again, going back to 2017, tax acts. Prior to that, we could deduct things like publications, investment expenses, things of that nature. We can no longer do that. So in order to get a deduction has to be an act, it has to be a trader business. So it has to be something that you're in that is related to a business profit motive that you have. And if you do have that, then it's looking at, in the tax law, it's just has to be ordinary, necessary. And everyone says, well, what's ordinary necessary? Got to look at what sector you're in and what is ordinary necessary. You know, myself, having a jet and flying clients in to meet with me is not ordinary necessary in the CPA world. But if I was a hedge fund manager in New York City and I was trying to win a huge account, that would be ordinary and necessary. So anything can be deductible. You just need to look at what is ordinary and necessary and how to make that ordinary and necessary.

Thank you, Tim. Another question is around funds. So talking about, you know, if you invest in one syndication, you get a K1 for that. And it's like, okay, that one syndication was in Texas. If you invest in a fund and it's a real estate fund, it's a syndication real estate fund. And there's some properties in Texas, some in North Carolina, some in Georgia, some in Indiana, you get one K1 from the fund. But then do you have to file taxes in all those states?

Yes, typically. Typically it will. Unless the fund itself files a composite return which has some restrictions on it, you will get a K1. So ultimately, the fund, if there's five different states that it has property in, will file in those five different states. So you will get one K1, but you'll get a K1 from North Carolina, from Georgia, from Tennessee, or not Tennessee, but from any state that has a potential tax liability. And. And then you've got to look at individually whether or not you rise to the level of needing to. To file. So, yeah, gets a little cumbersome with funds and especially if there are funds. You know, I've seen funds that have 30 or 40 states, so it can be.

Yes, that's quite a lot. Yeah, because it's good to be diversified. That's why you're in a fund. But then if it's too diversified, then it does become cumbersome. Wondering if it's the same with an oil and gas fund investment. So, you know, we were talking about if there's one drilling site, you're at risk if it comes up dry. If you're in a fund that has 200 drilling sites, maybe it's across four different states, then you'd have to file in those four different states.

Correct, Correct. So, and a lot of times those funds, they might be diversified, but they might be all in one state. So you might have some, you know, that are in North Dakota, Texas, Pennsylvania, Mississippi, wherever it might be. But yes, if they're in all four of those states, except for Texas, that doesn't have a state tax, you might have to buy on all those states.

Got it. That's what I figured. All right. From Kristen. I'm selling. Well, let me check. We're at the top of the hour. Tim, we have a lot more questions. Are you able to stay on another half hour or do you need to go?

No, I'm good.

Okay. All right, these are. It's a large participation when it comes to taxes. Always. All right, so this is Kristen selling a property in an LLC that is taxed as a partnership. Members are me and my husband. Since we're selling in the name of the llc, do we have to purchase in the name of the LLC. In order to avoid paying the capital gains? I'm summarizing if they're using the oil and gas investment. There you go. Kristin? No. All right, I'm going to scroll through because some of these are redundant of what we already answered. All right. Is the self employment Tax still applicable for the oil and gas investment once the GP has been converted to an lp?

Yes, it's throughout the life, actually it's throughout the life of the investment. But it, but actually in the tax law or tax code, it specifically says that a working interest in an oil and gas well is subject to self employment tax regardless of if you're active or passive in it. So.

Okay, cool. Scrolling through, looks like a lot of the same. Oh, here's a question around trusts. So I'm not very familiar with this but I did have a lot of people ask me is there. And this goes into, you know, one of the top three ways to. To save on taxes using entities do trusts. Is there any advantage to using trusts when you're making investments? Whether it's oil and gas, real estate.

Anything depends on your state. I mean it depends on what you're trying to do. You know, trust or trust are outside of partnerships. Trusts are kind of one of the, one of the most valuable structures that you can have in the tax law. So they're utilized not only for estate purposes but you know, for, for income tax purposes. So it just depends.

Okay. All right. Question specifically for you, Tim, from Aaron. Do you personally invest in oil and gas and carbon capture deal?

I'm not answering that question. He's one of my clients.

Oh, okay. Okay. You know Aaron. Yeah.

So.

Okay. All right. You can ask him personally if you want. Erin. Okay, I'm gonna switch over to the Q and A now. I think we. Oh, I'll just hit on Dan's and then we'll switch over from chat over to the Q and A to answer questions. Dan is again asking. Can I use. Wait, oh wait, we answered this, Dan. Yes. So can I use the multifamily bonus depreciation to offset boot from a 1031 multifamily sale that I actively managed?

Yeah, I mean I think the answer there could be specifics to it that aren't that don't allow it. But in most cases I'd say yes.

All right. Do we get depletion allowance? I'm. Tim's shaking his head yes.

Yes. So that's one of the things with oil and gas, not only. So you've got to look at when you think about a multi family in depreciation. Depreciation is just deducting the asset over its useful life. So you've got a multi family building. It's the useful life in the IRS size is 27 and a half years. You deduct it over 27 and a half years. It might be 50 years old, but ultimately you still, you buy it, you get to deduct it over 27 and a half years because that's the way that the IRS sees its useful life. Same with depletion. Depletion is just saying you're depleting the minerals in the ground. And so we're going to give you the opportunity to docs the cost of those minerals over what we feel is its useful life. And the way that they do it is they say you get a 15% deduction against gross revenue on an annual basis. There's different calculations you can do. Some are intent, you know, really intensive. But the easy way to think of it is about a 15% cost depletion based on gross revenue on an annual basis.

All right, there's someone else asking, is the 560, 580k limit per person or for a married couple that's married? So if you're single, it's half of that?

Correct.

Okay, will my taxable income be calculated with gross income minus the investment in oil and gas? 1 to 1 and my tax bracket set at the new income? Oh, so like I think what they're saying is If I make $400,000 this year and I invest. Okay, that's not a good example. How about I make $200,000 this year and I invest 150,000, so now my gross is 50k, which is a different tax bracket than if I make 200k. So now do I pay a lower percent tax?

Yes, the US tax. So you, when they talk about marginal tax rates, that is the last that if I tell you you're in the 37% tax bracket, that means that the last dollar that you earn is being taxed at 37%, but every other dollar prior to that could have been taxed at 0%, 10%, 12%, 24%, 30, you know, all the way up to 37%. So one of the points, and you know, one of the things that I do and look at is how efficient can we be? So if we're starting, you know, in this situation, let's say we're making half a million dollars a year, but we're handily into the 37% tax bracket. Well, we've got 37, you know, all the way through the 30s down to the 24. You've got this huge jump from 24 to 32%. So a lot of times what I look at is, okay, well, what deductions can we take to get us down to the 24%? Maybe the 22%, because effectively we're only paying tax at like 17%. And so that's super efficient. Especially if in the next year we're going to be up at half a million dollars again. I'd rather take a deduction at 37 cents than a deduction at 22 sense. So ultimately that's kind of what you've got to look at when you're doing this and when you're planning is make sure that you are effectively using these deductions and efficiently using these deductions to pay the least amount of tax that you can using the tax law. Yeah, so the question, I think, so.

It answered it for me. All right, this is from Sheldon. What about investing in a working interest through a trust? I think we already answered that. All right, if you invest in oil and gas and you take 75,000 deduction the first year and the well comes up dry the second year, can you take the, so assuming $100,000 investment, so if you lose everything, then in the second year, can you take THE $100,000 you paid for the investment off your second year taxes?

Yes.

We prefer that not to happen though. You'd rather make money and pay taxes on it than lose money and pay no taxes? Personally, yes. All right, Sachin, what is the strategy to avoid capital gains this year besides 1031 and Opportunity Zones? So we went through that, Sachin. We're talking about oil and gas and carbon capture. Those can both help you out there. Okay, so this is a little bit more complicated. This is from Benny. So it's going back to the Roth IRA conversion. So the oil and gas can cover our taxes for the conversion. But do we still pay the piper? He says later on when the recapture happens?

I mean, ultimately, yes. I mean, you're going to pay the piper because you're deducting again, if it's oil and gas and you're taking the deduction, you've got to think of any investment that you do, as I like to think of it as a piggy bank. You put $100,000 into that piggy bank. If you get a, if you get a distribution from that piggy bank. Well, now your, your basis in that Piggy bank is $80,000, let's say because you got $20,000 back. If you got $100,000 loss, that reduces the amount that's in that piggy bank. So now every dollar that goes back in is income to bring you back up. So ultimately, yes, you're going to recapture it. But time value of Money, you're going to recapture it at a later day, be able to use the tax dollars to reinvest, and ultimately you've got inflation to think about. So, yes, you're going to repay it, but if you repay it five years from now, it's going to be at a lower rate and, you know, a dollar with a lesser value.

Thank you for that. And then there's a question from Benny and I think this would be great for everyone as people have really specific number of questions. Tim, is this something that you can help people with if they're like, okay, well, I want to do a conversion. So in order to do that, how much should I invest in? These are people who are already thinking of investing in my offering. And so they're wondering, like, what is the specific number? So if they want to work with a tax strategist to figure out the exact numbers that they should be using, what's the best way for them to get in contact with your company?

So two ways. And yes, definitely, this is something that we work through daily. This is kind of how we work with our clients to look at what we can do to mitigate taxes. But you either go to our website at, you know, provisionwealth.com and up in the right hand corner there's a contact us button, or you can send an email to contact provisionwealth.com.

Putting that in the chat. And then also you guys will have that information when we send out the replay, we're going, we will have that contact information well, as well. Right. And I think that's really great because there's, there's the concept which you got today, but then how does it apply to you and what exact numbers are you supposed to use? And, you know, what state do you live in and what entities? Like, there's a bunch of strategies we talked about today, but before you execute them and go, okay, so I should, I should, you know, invest this number. I would suggest talking to a CPA if you have one. If you don't have one, I strongly suggest contacting Provision. A lot of our, I don't even know how many investors we send over to Provision because they, they're adaptive as well. So it's not just like, oh, they know real estate, as you can see, they know oil and gas as well. They know the investment space, they know how to structure entities. They know how to look at what are your goals and how can we get you there. So I really, really strongly suggest going ahead and contacting them. Contact@provisionwealth.com and we send out the replay. You know, share the replay with someone you make your investment decisions with, whether that's your spouse, your child, your parents, your cpa. If you have questions, definitely reach out to provision. And if you have questions about investing, you can reach out to me in the replay. I'll have, I mean you have my email because you're, you're on this webinar, but I'll also send you an email with all my contact information.

Yeah, it's. Oh God. I was going to say it's extremely important. You know, a lot of times you, you watch things and you look at things and it's, it's one size fits all. And in tax law it's not one size fits all. So you've got to be very careful and proactive in what you're doing and make sure that you're talking to someone that's educated and understandable or understands what you're trying to accomplish simply because doing things in a vacuum and thinking that you can. You know, everyone talks about real, you know, real estate was a huge boom. Everyone was talking about real estate. And being a real estate professional, well, that might not work for you. That might not be something that you can do. I will never be a real estate professional because I'm full time, you know, full time job is provision. So for me, real estate's a really great investment and something that I do invest heavily in, but I don't invest in it in a way to offset my ordinary income. I utilize other avenues or vehicles to offset my ordinary income. I invest in the real estate to ultimately offset other passive income and ultimately for the growth that it has.

Yeah, and like you said, that's the sweet spot is getting to all the passive income. So if you always have active income and you never invest in things that give you a passive income, then you're always trying to offset your active income tax. But ultimately you want to get over to everything passive offset your passive income tax with those and that, you know, living the dream when that part happens.

Exactly. That's super simple. That makes my life so easy.

Yeah, there you go. I also put in the chat everybody a link to book a call with me. So I seen Jacob, you're asking is a recording of oil and gas deal that I did there is. If you guys have any questions about investments and you want to talk to me about investing with Sugo Capital, you can click in the chat. It's sugocapital.com if you have questions about taxes, don't ask me Ask the. Ask Tim's team. That's your reach out to. But if you have questions about investing, we have the investments that we've been talking about. So you can reach out sicocapital.com backslash bookacall and you will get me if you use that link. All right. All right. I think we hit everything.

Looking at, I was gonna say the one, I see one from Mercedes. I used to live in North Carolina, so I'm well versed in that state. But we also have, we have two managers that reside in North Carolina. So one of the, one of the nice things about provision, we're virtual. We do have an office, but ultimately we have client. We have staff throughout the country and clients throughout the country. So we file returns in every state and we're pretty well versed in all of them.

Perfect. So that goes with Mark's question. He said, do you have expertise in California?

Unfortunately.

Seems like if you're in California, don't contact me.

I always joke about it because, you know, you know, I'm from there and live down the street from you. And so, you know, ultimately I love California. I hate California when it comes to taxes and bureaucracy. So I'd move back there tomorrow if it wasn't for that.

Yeah, yeah. And I decided to stay, pay the taxes and just make more money. Well, work with Tim to see how we can not pay so many taxes in the legal way. Of course.

Yes.

Cool. All right, well. Oh, this is a question from Jeff. Does provision write letters?

Accredited letters, Accredited letters.

If you're a client, correct? Not a client, no. If you're not a client, you need your own CPA to do that or use verify investor or something like that. But Tim signed one for me because I'm a client. Oh, this is a good one from Alberta. So as it relates to setting up tax efficient structures, is it better to talk to a CPA or an attorney for the legal structure first?

From the legal perspective, always talk to an attorney, always work with an attorney. Don't work with a doc prep or someone of that nature. But ultimately what we do is we work with attorneys. So if you've got an attorney that you work with, we look at where you are today, what your structure looks like, what tweaks you might have or what tweaks we think you might need. And then we sit down with the attorney. So, you know, ultimately, if you're already working with an attorney, we sit down with the attorney, say, hey, this is what we're thinking. What do you think from a legal standpoint does this pass muster? If you don't have an attorney, then we've got some that we can recommend that we've worked with for years and years. But ultimately the structure and the legal side of that structure needs to be vetted by an attorney.

There you go. Perfect. What about international matters? Actually, yeah, that's going to be. And I need to set up a call with you, Tim, because we started doing stuff out of the country. It was just like we did it. And then we're like, oh, wait, we need to talk to Tim. But yeah, there's.

It depends, you know, a lot of foreign investors investing in the United States, things of that nature and one offs. Yes, but with 2017 and the new Gilti Tax and what they did with all that, I stepped back from doing a lot of international. And as a firm we did as well because there's a expertise that's needed and we just don't have a competency to do that.

Okay. So that's for people who are international investing in the US and also for people who are in the US and investing internationally.

So if anyone's international investing in the US we can work on the domestic side and work with their accountant, whatever it is in the jurisdiction that we are. But I will not be able to advise or we will not be able to advise on how X is going to be taxed in New Zealand, so to speak. And then same thing. I mean, we can work with you on an investment that you make. You know how that investment in the US Is going to be taxed or treated if you're making an investment in Ireland. But you're still going to have to talk to someone in Ireland that has the expertise in Irish tax law to get advice on how to handle it there.

Great. And Tom said he is a provision client currently and that provision is helping him with his foreign investments for the past few years. And it's been working very well. But he also has a country specific guy. Thanks for that, Tom. All right, well, I'll say let's wrap it up. There is people asking me, those of you who are Sugo investors and you're asking about proof of accreditation, go ahead and shoot me what you have and then we'll verify if that works. If you already have one from another investment, I don't know what Parallel markets is, send them over. I'll take a look and we'll see if we can accept it. Okay. Well, Tim, I'll say thank you. I always appreciate you being willing to help out our investors, especially as we're making these pivots and we have new things. And I, you know, I'm less familiar with how the taxes work on those investments, even though I've done the due diligence on the investment. The tax side is always something I love to have you explain to people as a cpa so I don't have to get in trouble for saying something wrong. So appreciate that. Thank you very much. Lots of people saying things so everyone appreciates your time. It's a huge value add. And to everyone who came here, you know, from Tim, I'm sure you're invested across the sector and you're using the strategies that Tim's using. So I hope this is value add for you as well. We'll send out the recording, like I said, with both of our contact information on there if you want to continue to work with either one of us. All right, thank you all. Thank you, Tim. Any last things you want to say, Tim?

No, I mean, really, just make sure that you're being proactive in everything you do. It's extremely valuable if you look forward and not look back. A lot of times people are always concerned on, you know, concerned about something else. But if you're not looking forward, when you're looking at planning, whether it's investing or tax, you're going to find yourself in a position where you can't do much and you're going to end up having to pay tax.

So, yeah, be proactive. Now's the time. Perfect. All right, well, thank you, Tim, and we'll see you next time. Bye.