The Tax Strategy Billionaires Use That Almost Nobody Talks About | Ep. 442 with George Dimov, CPA and President of Dimov Tax

0:00That's really how the ultra high net worth really don't pay taxes because the value of their net worth is tied to the stock. Someone's going to borrow against it effectively never actually pay tax. George Dimov built a nationwide CPA firm out of the 2008 crash, licensed in all 50 states, 20 years inside the tax code. And he's about to show you the playbook. What do you think is the single most expensive mistake that smart people make around taxes? People that tend to overthink or be very nervous tend to overfed. The IRS has a profile on every industry. Somebody that owns real estate can effectively pay very little to no tax depending on how they...

0:51There's something that I've always wanted to know about. And this is how do the ultra wealthy pay less taxes? What do rich people know that the rest of the people don't know? That's a great question. And it's something that gets, first of all, thank you for asking that. It's something that actually gets discussed quite a bit by politicians. And there's always these laws being kicked around exactly on this topic. How do rich people continue to increase their wealth without actually paying tax? and one of the main ways is and we're talking about people that are ultra high net worth i'm not talking about people making a few hundred thousand or even a few million or even a few tens of million those are called the working rich people that are working they may own a string of medical offices they may own a string of dentistry offices they may own a business that's generating income those are working rich okay those are people that are earning a lot of money and many of them do get taxed quite a bit.

1:54OK, there are some ways around that and there are some different types of structures that could be implemented for those people. But if we're talking about people that are billionaires, most of the time their income, pardon me, their net worth is tied to their stocks. OK, so what happens in situations like this is the reason why they're becoming richer and richer is because the underlying net worth that they have is tied to a security, a stock that they own. For instance, let's say somebody is the founder or co-founder of a large technology company. That stock may have gone from a par value of under one cent to worth hundreds of dollars.

2:36And now all of a sudden they own millions of the stock and they're billionaires. And what happened during this time, the stock appreciated the value, but no actual taxable transaction occurred. In other words, they're only taxed when they sell the stock. And there was an example of this, Elon Musk, a few years ago, there was one of these people from Congress that criticized Elon Musk for not paying tax. And he said, OK, I'll pay some tax. And he sold something like$10 billion worth of stock. Or I think his actual tax obligation was$10 billion. So he sold a lot more than that. I don't remember what the exact figure was.

3:12He said, okay, I don't pay enough tax. Here's 10 billion. And I bet you're going to misspend this 10 billion anyway. So he kind of made a joke out of it, but he actually did it. Right? So that's really how the ultra high net worth really don't pay taxes because the value of their net worth is tied to the stock. Now, if they actually want to use it, they have to sell it and they can pay some tax or some of them borrow against it effectively never actually paying tax, which is another strategy. Tell me about that. Well, there's this theory that if you have your net worth tied into this, this actually is a rich person strategy that anybody can take advantage of to some extent or another.

3:49Many 401k programs may allow you to borrow from them. So let's say that you've been contributing to your 401k for a 20 or 30 year career and you have called a few million dollars in there. OK, depending on how it was invested and how that performed. There are some 401k programs that I've seen in the past allow you to borrow against that. So what happens is you take out a loan. Of course, you have to pay interest. But since it's a loan, you've never actually cashed out of this money. You've never actually distributed this money. So you're not paying taxes on this money. And this is a kind of a not necessarily a loophole, but a strategy that some people use that have quite a bit of net worth tied to a particular security.

4:27They borrow against it. And now, of course, you have to find the lender that will allow that, et cetera, et cetera. But it is something that theoretically can be done that we've seen in some cases. What do you think is the single most expensive mistake that smart people make around taxes? So there's a it really this question really depends on what asset and income bracket people fall into. And when I say bracket, I don't necessarily mean how much they make or how much they own. It really matters on how they earn their income and also how they have their income invested or how they have their assets invested.

5:02So, for example, somebody that owns real estate can effectively pay very little to no tax depending on how they structure the real estate and depending on what they do in terms of tax strategy with it. For instance, cost segregation studies are a way that people can front load depreciation and take a deduction against other forms of income if done correctly, which could reduce or completely eliminate their tax bill. So that's somebody that's real estate heavy can actually eliminate in the short term their tax bill using cost segregation studies and using real estate as a strategy. Now, somebody that doesn't have real estate at all.

5:41OK, that might be a W-2 employee. The single most common thing that I see people miss are simply the things that are offered by their employer. You'd be surprised. Many people just simply don't take advantage of these things. And one of them is your 401k mash. this is something that people ask but finally pushed me to start my own thing honestly i just stopped waiting to feel ready because you never do you just start and when you're starting you don't want to get buried in technical stuff before your first sale that's where shopify came in for me everything i needed was there from day one here's what i wish someone had told me you don't have to know how to do it all yourself when we are gearing up for a product launch shopify is what made it actually happen.

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7:06And even the deduction itself is the single biggest thing that we see employees simply not max out. And this is, you know, tens of thousands of dollars worth of a tax reduction. And so this is this is the single biggest thing that we see just kind of normal, smart people because your question was what do we see smart people miss out on? That's the most normal thing that we see smart people miss out on. Now, if there are business owners, there's a whole array of different things they can do. And that's a whole, we can do a whole podcast episode just on that. If everyone's a business owner, I'd just say contact us.

7:37We'll send you a list of the top 12 things because there are many. Since this show is really an entrepreneurship show, can you give me two or three things that you think are some of the biggest ones for business owners that they're missing? For people that are older, they should explore getting a defined benefit pension plan. Those can lead to a few hundred thousand dollars worth of taxable income reduction if they're done right. And it ends up being still your money. It just goes into a retirement plan. Same thing goes for people that are at any age, but especially, well, at most ages, especially if they're younger, they can contribute over$70 ,000 to their SEP IRA or solo 401k.

8:15That's if they have a business, if they're an entrepreneur. I highly suggest doing that. Many of these things, by the way, you don't need to hire anybody to set up there. You can set it up on, you know, any online brokerage platform often allows this, which is called a SEP IRA, SEP, S is in Sam, E is in Edward, P is in plan. I think it's a simplified employment plan or something is what it stands for. I don't recall, but this is something that you could set up yourself. A solo 401k takes a little bit longer and many of the brokerages charge some underlying fees to administer it, but that's also something that you can set up by yourself.

8:52We can ask your broker to do it for you if you have a stock broker. So these are two things that I'd say major. Another thing is it's crazy. And I'll speak for myself. Every few months, I just review my bookkeeping. I find thousands of dollars of just pure waste in there. Subscriptions that I didn't know I had, services that I didn't know that I'm still paying for, contractors that I didn't know I'm still paying for that are doing a lousy job or not working at all. We've, we see companies all the time where they have employees. They didn't even know we're still in their payroll. Okay. So I'd say another major thing, if you're a business owner, just simply self audit your own bookkeeping or have a trusted person.

9:38Now it is an extension of that. This is a very crazy, you know, I've attended lectures by Vern Harnish, who does these scaling up, you know, kind of seminars. And one thing he always says that we've also seen is that every year somebody approaches him that says, hey, my most trusted right hand person has actually been stealing from me for the last 25 years. And it's around 20 million total. And we're going out of business. And he says he sees it every year. And we see this all the time. Common places you see it is obviously HOAs and condo associations, somebody on the board, you know, maybe cutting invoices to a related party for work that needs to be done in the neighborhood.

10:15So we see that a lot, but we see it in small businesses and medium sized businesses as well. Vern's awesome, by the way, I always love Vern. I think in the future, we're going to see a big rise in freelancers, people that they don't want to work a 40 hour a week job, they want to be able to freelance and bounce from place to place. You say though, that they are overpaying out of fear. Why is that? so gig the gig economy has been front and center in the news probably since covet i think in 2020 is when it became kind of a news headline thing so this is this has been a reality for a while now people not really working a traditional job but maybe having um maybe having more than one gig OK, so this is something that we've been seeing for a long time.

11:06And I'd say. The smart people are the ones that are acting out of fear, and I'll qualify the statement. People that tend to overthink or be very nervous tend to overpay. And I even remember an in-person client or more than one that came in. And we had one that was an attorney came in and he made a few hundred thousand dollars. And I said, what was your deductions? He said nothing. And I said, well, don't you want to use business use of home? Or how much do you pay for your computer? Or how much do you pay for your Internet? How much do you pay for your vehicle when you're going to meet a client or an offsite place that's not your regular commute to your regular office?

11:53If you even have one, how much is how much you spend? in courses or things to continue to stay on top of your profession. Last week, I'm standing at the open fridge at 1245 late for a call, staring at a takeout I didn't trust anymore. And I realized I'd been thinking about lunch since 10 a.m., not eating it, just thinking about it. Where's it from? Is it worth the money? Do I have time? Every day that loop running in the background. I was easily dropping$100 a day on lunch I didn't even care about. That's when I made the swap to Huel. And this matters. It's not a shake on top of food. It's a complete meal instead of food.

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13:09All these are things that smart people tend to miss because they're nervous that they're going to get audited or they're not going to find the appropriate backup. But what you have to remember is the IRS has a profile on every industry. In other words, they have decades of information on thousands or even millions of submitted tax returns, and they know each industry. What your typical expense line items are is a percentage of your P &L. So that's how people actually get audited is when they do really silly things like the common example that was all over social media a few years ago was this G-Wagon deduction that somebody invented.

13:45OK, that said that what ended up happening is people earning only a couple hundred thousand dollars a year would buy a very expensive luxury vehicle and write off the whole thing in their returns. And so the IRS would see that huge, you know, hundred thousand dollar write off and immediately that return would get flagged. So essentially, as long as you're not doing anything like that, you're fine. And this is something that you spot check. First of all, the common sense and common sense isn't so common. So first, you have to use common sense, but that might not apply to everybody. Some people just genuinely might not know, which is also OK.

14:19You got to be careful when you go on social media, right? You got to be careful who you listen to. Is there a benefit for, let's say, leasing a car, renting a house versus buying a house or buying a car? You just have to chop the numbers through the tax return to see which one plays out best. These questions are best answered when you have when when you book some time with your accounting professional and actually run the analysis. Now we have ChatGPT, you can ask them. Of course, half the time it's wrong, but it's something that you can run through ChatGPT, but then you can also book maybe an hour or two of an accountant's time to run some scenarios with your data in there.

14:57And clients have us view this all the time. I've read that there's more people starting businesses now than ever. There's all these one-person businesses. If somebody starts their business today, what is one thing that they should do to start to set themselves up for success? So that's a great question. Really, when you started saying this one person business, it reminded me of the founder of OpenAI or the CEO of OpenAI said that we're going to soon have a one person billion dollar company. I don't know if you saw that it was in the news. And I think maybe it might have already happened or will happen where somebody has literally themselves one employee and they have a billion dollar valued company.

15:36so um so that just reminded me of that um but to answer your question the most businesses i'd say you have to start off and make sure that you have the right structure i can tell you some things that i've seen done before and these are can be questionable depending on how they're structured but i've seen people start a company and put their entire investment in a roth which is not taxable regardless of how much it grows. And then five years later, when they sell their share and it's worth$25 million, all of a sudden they have a Roth 1099 distribution that says$25 million, taxable portion zero.

16:16So I've seen things like that. So that could be questioned by the IRS, but I've seen other things such as using an 83B election, meaning that they are receiving all of the shares at the par value at the time that it was granted. In other words, virtually nothing. Okay, so then later when they do sell the shares, it's all capital gains. So they're only paying 20 % rather than their full taxable income, which could be as high as, you know, in the 40s. So we see things like that. Let's go back to your story. You started in 2008, which could be the worst year to start an agency or a firm. Well, you'd be surprised.

16:58I mean, quality work is always in demand and having somebody that is available is always in the med. The biggest complaint that we hear in accounting and the biggest reason people approach us or even change accountants, period, is a lack of responsiveness. And this applies to anything. How hard is it to find somebody that you truly trust to work in your vehicle? How hard is it to find somebody that is truly the best dentist? How hard is it to find somebody that's the best therapist, that's the best fit for somebody if if they are using mental health services. So this kind of just all feeds into this idea that regardless of what the economy is doing, certain services need to get done, and accounting is one of them, and there are just very few people that may actually want to do that service.

17:45I mean, think about from anybody that you might know personally, how many people say, I want to fill out government tax forms for a living. Nobody actually says that. So it's a very difficult thing to find regardless of the economy. You said before about there's a lot of CPAs retiring, so they're either going to sell their business or close. There's also a lot of people going into being a CPA. What's going to happen to the industry? That's a great question. And this is something we talked about before the call. And it's something I actually even am interested to hear a little bit from you is how is an other end of it?

18:21Because I'm seeing what's happening with baby boomers leaving accounting right now. There's nobody to replace them because the last few generations have pursued passion careers, things that they like and things they're passionate about, rather than things that are necessity careers. And one of them is accounting. Right now, you just don't have people that want to do accounting. We've had people that work at my company that have a CPA license that on good terms resign because they want to start a completely different career, whether it's in the medical services, veterinary services, mental health services, just something completely unrelated to accounting.

19:00So we see people just leaving the industry. Matter of fact, there was an article that came out right during the COVID years that said that right around that time, people rethought what they want to do with their life and 300 ,000 people, which is 17 % of the accounting workforce left the industry. So there's just a massive shortage of accounts. But what have you seen with other interviews that for baby boomers leaving? What trends have you seen? We had an executive on that was telling us around they have thousands of financial advisors and the advisors are working on people that are baby boomer age to get them to be able to set up trusts around the estimated$80 to$100 trillion wealth transfer that's happening between now and the next 10 years as baby boomers pass away.

19:52So what I want to know is what happens to that wealth from a tax perspective? I think that I'm kind of, you know, this is kind of a little bit my opinion. I really do think that it's unfair that the government taxes somebody their whole life. And then afterwards, when they've passed away, somehow this money that was already taxed gets taxed yet again. I just think that that's really unfair. And I've seen even posts on social media that break down how we get taxed so many times over. For instance, our income gets taxed when we receive it, but then we get taxed again when we actually have to buy something.

20:25So this is money that essentially got double taxed. So people have done this analysis where we're being taxed on our home that we own, that we purchased with money that was already taxed. And we're also taxed on income that we earned, but then also taxed on products that we're buying with that income. And now you have this other that everything that you've ever earned ends up getting taxed again. Now, of course, there's thresholds in each state has different ones, which are estate thresholds on how much you get taxed, if any, depending on how much assets, how much value and assets is being transferred.

21:00But the kind of the larger scope of your question is if somebody truly is a very high net worth individual, they need to start planning now. Okay, so, and we have an attorney on the team that's an estate and trust attorney on my team here at my company that puts together these type of plans. So 2008, you start, the world's basically crumbling, all this stuff is happening. What did you find that helped you, maybe the secret sauce to scaling and growing your business? I'd say being flexible on everything, being flexible on the type of work I'm taking on, being flexible on the type of client. For years, I really stayed small.

21:43I really stayed kind of just a one person type of situation. But I'd say when I started to gain more and more clients, it was when I really focused on tax specifically and personal tax specifically. And that's just because people need personal tax. And it's extremely challenging, extremely difficult. and larger companies don't want to touch personal taxes. You can't charge much for them. A client will get shocked at a$700 invoice. Well, an attorney charges a$5 ,000,$10 ,000,$15 ,000 retainer just to get started in a case. And with us, our pricing expectation from society is extremely, extremely low for a professional service.

22:28When you think about hiring a professional service, Think about hiring an architect, that's$5 ,000,$10 ,000,$20 ,000. Think about hiring an attorney, that's$5 ,000,$10 ,000,$20 ,000. Any of these professional services, but then you hire an accountant, it's like$1 ,000. But then the client has an expectation that they'll get the same level of attention from that. And we have to kind of do our best to bend over backward to make sure that that happens. It's an extremely challenging profession. And when you add to it, the emotion that comes from personal tax return preparation, Many people do not understand tax.

23:01They don't want to understand tax. And it's the last thing that they're interested in. It's actually probably the most uninteresting thing for people. And then all of a sudden they're used to getting a refund, but now they have to pay. And, you know, obviously we made some kind of a mistake. Right. So then it's more, you know, it's an emotional conversation. So this is why and oftentimes it's simply a matter that they earned more and they withheld less because of some change in their payroll department at work. and that's the only reason why they owe money and but it's an emotion but we're the ones that we have to break the news so many accountants because of the and there's another issue with personal tax returns they only come up once a year so how do you build a workforce that essentially does nothing all year except for during the tax season how do you keep them paid while also completing what's essentially a low, low margin engagement.

23:56And so these are all the challenges that have many business owners that are accountants saying we're only going to focus on business returns because we can do their monthly bookkeeping. So we have something to keep all the team busy and actually pay our bills. And businesses oftentimes, especially if they're large ones, it's less of an emotional conversation. So, but we've, I'd say maybe we're brave. We just take on these clients. And I actually love working with personal tax return clients. I don't want to sound like I'm complaining. It's actually one of the most rewarding things when you're the only person that's available that actually cares and that wants to do a great job.

24:33And I'd say one differentiator about our firm, I genuinely really, really, really do care about the client experience. Like I want the clients to have a great experience. If something falls short, we will do anything possible to fix the issue. and many companies can't say that. Many companies treat clients as a disposable unit rather than as an individual. Do you think a lot of this also has to do with technology? And I think a lot of industries are going to go through this. People say, oh, I can get this technology that can do it for free. I could do my taxes online for free or whatever it is.

25:08And I think a lot of industries right now are going through the technology can do it for cheap, But I've had really bad experiences with those technologies before. And I think you want to do it until that happens. And then you realize you should have gone to paying the service is going to be better for some people. So, yes, I mean, when is the last time that you called a business of any kind and been happy that you got the AI chatbot? It never actually solves the problem. So companies now, because of their investors, feel pressure to be AI. And there's jokes about this on social media where a company, you know, the investors say, we need AI.

25:55So then the manager tells the operations team, we need AI. The operations team tells the client, you guys need AI. The client says, I don't want this. This doesn't work. And it sucks. So then it goes back to the chain all the way back to the CEO. And the CEO tells the investors and they say, well, I'm not going to invest in your company unless there's AI. So what do you do? The final user doesn't want it. I've never, you know, even if there's an issue with my Uber order, if I go to the AI chatbot, it rarely actually solves the problem unless it just gives a refund. That's probably the only time where it's like, OK, you gave me my dollar 22 cents back for the sauce.

26:34I never got cool. So I'd say we're very far away. You know, the example I gave is we had one financial statement that was internal, not a client one that was literally adding columns and perplexity botched it or cloud or whatever, whatever software my internal accountant was using. So I think we're very, very far away from having these actually working. And as far as your comment about people using TurboTax, TurboTax is a very good tool for people that have a simpler tax situation. When it gets more complicated, they just need professional help. When you think about the ability to scale, was there a certain marketing strategy that you use to acquire customers?