225 - The Business That Legally Eliminates Your Tax Bill with Kriss Bergethon

0:00She said, good news, you're not going to owe anything. And in fact, I think you're going to get a bunch back because it's an entrepreneur. So I did the cartoon eyes, the awool guy, like what? I think you're emailing the wrong guy. Wait, you just told me I won't own your taxes. My tax bills at the time were low to mid six figures every year. I was like, wait a second, you're making like$2 million a year just in rent from your commercial real estate? And he's like, yeah, and it's pretty awesome. So effectively, you just divide the 100 ,000 by 10 % and you get a million dollars. And I was like, wait a second, wait a second, a 10 cap is a 10x multiple?

0:34Chris Berg, you are a serial entrepreneur. Your companies do close to$10 million a year in revenue. You've got tons of different businesses. You've got e-commerce, real estate agencies, like you're an entrepreneur's entrepreneur, which I freaking love. You said two things to me before we got started. One was you were not planning on being an entrepreneur. So I'm so excited to explore that with you because I'm like same. And then the second thing was you started this incredible flywheel with your businesses about how you generate cash and then where you put that cash in tax advantage vehicles. And then that feeds back into the business.

1:08Like it's kind of blowing my mind. Can you just tell me that? How does the flywheel work? Yeah. So I've had an e-commerce business for almost 15 years now. It's health supplementing, but that business kicks off nice cash flow for me and my partner. I live on some of that money and then I pour excess profits into commercial real estate. So I have four car washes, two car washes under contract and a gas station. And that whole thing has completely nuked my tax bill for three years now and should have been for this fourth year too. So nuked it in a good way though, right? Yeah. I paid zero income tax.

1:52I pay a lot of property tax. I pay a lot of all your local taxes, sales tax, all that stuff, but zero income tax. So the idea is generate high cash flow from the e-commerce business or whatever high margin business that is. And then you funnel that money back into real assets, real estate, because you can use bonus depreciation being one of them to offset your tax bill. So then you have more cash to then reinvest in business, which then grows that business, kicks off more cash. And it's just like this virtuous cycle. Is that fair? So here's the thing. I wasn't smart enough to figure this out. I fell ass backward into this.

2:29I was looking for a storage facility to buy because if you recall in 2021, if you were on Twitter at all, you had to buy a self storage facility. It was, it was literally required to have an account. And I was looking for one to buy and nobody wanted to sell them because they were red hot. And my, the agent said, you should look at this car wash. You know, I think it's a pretty good deal. These guys are completely neglecting the business. So we bought it for like six 50. We went in, put in new equipment, which was not too expensive, We raised the prices up to market rates. We put it on Google Maps.

3:04It got a bunch of five-star reviews. And we doubled the business. And it went from making like, it was making like 65 grand a year. Now it's making 140, 150 grand a year. And we thought, well, this is really good. Let's do it again. We bought another one that was a carbon copy of that one. And that December, this is 2022. Every December, maybe you do the same thing. You email your accountant. Okay, well, what's the damage on taxes here? She said, good news. You're not going to owe anything. And in fact, I think you're going to get a bunch back because as an entrepreneur. So I did the cartoon eyes, the awoolga, like what?

3:40I think you're emailing the wrong guy. Wait, you just told me I won't want any taxes. Because my tax bills at the time were low to mid six figures every year. Because you were personally making from the e-commerce brand, like high six figures probably,$800 ,000,$900 ,000. Year after year. And I was used to paying for the tax man for$200K,$300K. And that was on top of my quarterlies. Right. So I had basically just made four or$500 ,000 and I didn't know how. I said, what are you talking about? And she said, bonus depreciation. And I knew that was a part of it because people were talking about it, but I didn't understand it at all.

4:17I didn't know what it was. That got my attention. And so ever since, I've been like all in on this. And so car washes are active businesses. A storage facility is a passive real estate. When you're renting a facility or you're leasing space or square footage, it's passive. Carwash is an active business. And for some reason with the tax code, the taxman decided that everything on a carwash and everything on a gas station is eligible for bonus depreciation, except for the dirt, except for the real estate itself. Can you explain what bonus depreciation is? It's basically a tax break that Trump did in 20.

4:55I think the first one is 2017. And then he just re-upped it with the big, beautiful bill. And it's a way to spur investment in small business. They want you buying equipment. They want you buying factories. They want you buying hard assets. And the way the taxman thinks of it is it has to have a life of 15 years or less. Okay. My favorite thing to say is, man, it's a real estate giveaway. It's almost like Like we had a real estate mogul as the president of the United States. It's so weird. It's so weird. Once you get into investing in commercial real estate, you'll realize, and really residential real estate is eligible too in a lot of ways, then most of the tax code is written for you to invest in real estate.

5:42And that's why it's such a huge flywheel. And I just kind of fell backwards into this, but it's a massive advantage. I'm just going to try to paint a picture for the audience if you're listening. So instead of, hey, I bought a million dollar asset, I made$100 ,000 in profit, I'm going to pay 30 % of the$100 ,000 to the tax man. Actually, what happens is you still made$100 ,000 in profit, but now you've got this 15-year depreciation on a million dollar asset. So we're talking about, let's call it$75 ,000 a year in depreciation because$75 ,000 over 15 years is about a million dollars. Now it's like, oh, I had$100 ,000 gain, but I have this$75 ,000 offset of depreciation.

6:20my taxable income is actually only$25 ,000. So I'm only going to pay, call it 10 grand, somewhere in that ballpark. That's the magic of bonus depreciation. The flip side I would say is they are wanting to spur investment in commercial real estate in particular, because we do have an aging infrastructure. They want you to come in and say like, crap, I just paid all this money. I can't afford to upgrade the facilities. So this is like one of the ways that they get you incentivized to have the money to invest in those facilities. So I I don't know. Did I do a good job of explaining the bonus depreciation idea or no?

6:53You explain straight line depreciation over 15 years. The bonus aspect is that you take it all in one year. Instead of the 75 over 15, it's a million dollar write off this year. Okay. Where were you two years ago when I sold my businesses, man? I have had a crash course in this stuff. So I've got the two car washes under contract right now. It's$4 million. It's two locations. The real estate, meaning just the dirt sitting under these places, is probably worth max of, let's say,$500 ,000. So the rest of it, the equipment, the building, everything on it are worth$3.5 million. With the bonus depreciation, if we wanted to, we could take a$3.5 million write-off this year.

7:40That would subtract from whatever income we had and would, for most people, would be a loss. and that'd be a loss that you could carry over probably for a couple of years. And, and for anyone who's right now, like, actually you can, cause you're not a real estate professional. Don't need it. Actually, you don't need it. These are real businesses. These are active businesses. They, they count against active losses, active gains. So if you have, I talk to people all the time that are like, Hey, I'm a doctor. I'm a lawyer. I'm making mid six figures, upper six figures. And I've got this massive tax bill.

8:14What can I do? This is an option. well dude this is what i was gonna ask you because i'm a freaking moron and oh my we're gonna get a lot of doing so i like i was like this is it cool i got some cash i'm making money i'm gonna go buy some real estate so me and my friend chris kerner would buy an rv park get the rv park things are going and i'm like all right cool well that should offset my taxes right and i go to my accountant And he's like, well, I mean, they're, they're passive losses. And I was like, okay, well, we'll just offset it against those passive gains. I have, you don't have any passive gains.

8:51So I'm like, wait, come on. Say what? So literally my wife, I have like 500 grand sitting in passive losses right now. It's just there. And my wife's like, why are we paying this money to the IRS? Don't we have all these losses you told me was just going to be offset. And I was like, Oh, I made a mistake. you have two under LOI right now? Yep. What's the combined value or are you okay sharing what the kind of the combined value of those two? Yeah, it's 4 million. Yeah. Okay. So 4 million, you're going to buy these. You're not going to pay$4 million in cash. I'm assuming you're going to finance.

9:24Yep. Okay. So you're going to put how much down to buy these$4 million worth of car washes? About 700 and change down. Okay. So you put$700 ,000, you get a$4 million asset and in year one,$3.5 million of your taxes. Well, now you can't have$2.5 million in taxes. So you got to start income. Yes. So let's just say you had$1 million in income, but you have a$3.5 million loss. Now you have a$2.5 million loss. So you're not going to pay any income taxes that$2.5 million will roll over to next year. Now we should caveat all this with talk to your accountant because everybody's situation is different.

10:04and the carryover is a little more complex than I'm making it sound. But these are the basics. This is the 101 version. And it's incredibly powerful for wealth. Well, the other caveat. So yes, we're not financial experts. And number two is you can't just do that and then sell the property and be like, oh, cool. I made$2.5 million. There is a thing called recapture. You're going to recapture. So my plan is to hold onto these for a long time. I'm really hoping to pass a lot of this on. I'm going to build a real estate empire. I want to have car washes and storage and gas stations. I want to build buildings.

10:43I want to rehab buildings. And I'm hoping to pass on an empire to my kids. Now, if they want no part of it, that's fine. But if I were to die and hand them off to the kids, then they reset their basis and they don't actually pay for the depreciation recapture. There's other options. 1031 is a huge option. Obviously, if you just got sick of the car wash, I can't do this anymore. You get 1031 and avoid taxes, but it is a tax deferral system at its space, at its essence. There's a million ways around that too. Yeah. But if you think about compounding, whether it's compound interest or just compound learning, whatever, the more time your money has to work, the more of a return you're able to generate.

11:24And so if you are cutting out, paying an extra$500 ,000 a million dollars a year in taxes, that money goes back into your assets and you're just compounding, right? So yes, eventually you pay the taxes, whether it's the recapture or if it's a 1031 and then you finally have to pay the taxes at some point. But you've now built up this massive base of assets, which is freaking incredible. I grew up, I knew a guy who had a, I'm going to have to describe it so he's not known. Let's just call it a commercial manufacturing company. And his company wasn't massive. It's doing about$7 million a year. Let's call it a million dollars a year in profit, okay?

12:00but he lived in this baller house baller house baller yard took massive like tons of trips very generous and i was always like what the freak and as i got older and into business i finally was like able to talk to him i was like how did you do this he's like well what i did it's not from my business i just took most of my excess cash and just started buying commercial real estate and over the last 20 years my commercial real estate i now make almost double than my business so i was like wait a second you're making like two million dollars a year just didn't rent from your commercial real estate?

12:32And he's like, yeah, and it's pretty, it's pretty passive. Now it's freaking incredible. And I always, I use that story now because a lot of people are like, I want to buy a business that generates passive income. And I always point to that example. I'm like, look, only way to get to passive income is you either inherit a bunch of money and you can buy real estate and then it's passive, or you work your butt off for X number of years and you accumulate an asset base and then you're just like getting checks. Nobody buys just like a quote unquote passive business. It's not a thing. No. And the car washes, you know, I'm working, it's probably down to about five hours a week now when I integrate these two new ones, that'll be another five hours a week.

13:16So my philosophy is kind of one in one out. So I'm sticking on five hours a week and in the beginning, it'll be closer to 10 to 20 hours a week of these new car washes. So I have to get something else off my plate. So in the other business, I say, okay, I'm not going to do this anymore. Hire an offshore worker or train somebody on the team to do this part of the job for me, because I got to go over here and work on this real estate for a little bit. So I'm always, I've always making sure that I'm not just adding things to my plate, taking something out too. That's key to it. Dude. Okay. I'm so glad I'm talking to you.

13:48You are, I think you're 50, right? You just turned 50. Let's turn 50 last week. Yeah. Dude, happy birthday. I turn 40 next month. So almost exactly 10 years apart. Man. I don't feel that way. I'm going to be honest. This is the first birthday. But like you're dropping some gold nuggets in here because I'm kind of dealing with that thing right now trying to figure out how do I delegate? How do I make sure that I'm not just putting things on my plate, but I'm actually then offloading it. You're also talking about the car washes, but it sounds like you don't have that many and you're just kind of getting into it.

14:20But so am I fair to assume that there was a period of time where you were doing entrepreneurship and you weren't necessarily optimizing everything? How long have you been playing this game? 23 years in January. I bought my first business in 2003, January 2003, with an SBA loan. It cost a whopping$180 ,000. I had 50 grand of my own money that I had made working heavy civil construction jobs. and got sick of the grind and actually all my bosses went to jail it was yeah i had this i was working in Alabama on this huge tunneling project and all the bosses were on the take so they would they were bid rigging and then they backing and all this stuff and i saw the writing on the wall and I left two weeks before the FBI wrecked and came in and seized everything.

15:17And so I was 27 and I just like, I hate this. I hated working for somebody else. I had zero entrepreneurial instincts. I didn't know what to do. I'd read a bunch of books, but I moved back to Denver at the time and my friend had just bought like a lube shop and he had gotten an SBA loan. He knew the SBA process and he had a similar path. And I was like, yeah, I think I'm going to do that. Found an excavation company and I did everything wrong. And I, I mean, I bought the business and two weeks later it was payroll. And I was like, wait, what? Cause I was looking, I'm looking at this money in the bank.

15:51I'm like, Hey, we're doing pretty good. And I think I had 15 grand and I think payroll was 18. And I was like, wait a minute. I thought this was my money. And so baptism by fire, but I grew that it was doing 180 top line, grew it to 2.6, 2.7 million, sold it four years later. Oh, wow. And just made all the mistakes. I was doing everything myself. It was a completely flat organization. And we went from three employees to 25 and they were all reporting to me essentially. And I was super stressed out and basically a home services business. We did excavation for... When did you sell? 2007, which was pure luck.

16:30I was just going to say, geez. Yeah. Yeah. So sold in September 2000. I think Lehman Brothers happened was that October was it October that year yeah so everything fell apart I mean just pure luck that I sold it and I did see the writing on the wall like a lot of my customers were custom builders they were like yeah they you know house used to sit on the market for a month and now it's sitting on that house on the market for six months and I thought that's gonna hit me in the wallet so is that why you got out or were you just like I want to do something else it was mostly sheer burnout. I was at the time, 2006, you had to, I don't know if you remember this, you had to buy how many minutes you were going to use on your phone a month.

17:10Like you had to tell, oh my gosh. Yeah, yeah, yeah, yeah. I remember going through the max package. It was like 6 ,000 minutes a month. I was using every minute of that. And I was putting 50 ,000 miles on my truck every year. I just drove around and yell the people on the phone for 12 hours a day. And I knew I would ever die i was really i was seriously gonna die if i kept doing that it was so stressful and sold it and completely literally moved off the grid we moved to steamboat springs i met my now wife right in that oh dang and she was like i don't want to live in denver and i realized i didn't really either so we moved into a house that was solar and wind powered and with just complete opposite right there was nothing going on now i lived in a house where i would hear like police helicopters flying overhead and then we moved up to the grid and it was like wow we have to drive an hour for food so it was yeah you went from putting 50 ,000 miles a year on your truck to like five yeah and you were it yeah we started you know kind of homesteading and that kind of thing and I had to figure out how to run this house off solar hey I don't know if you remember this but when we started this podcast we entered into a social contract I would spend time energy and money producing this podcast, interviewing these individuals and giving you insights into how to build, buy, start, grow your business.

18:29And you would like subscribe and leave me five-star review. Now, out of that, we both get to talk to really cool people and hear really cool insights. We both get a ton of value, but I just want to help you keep your word. So would you do me a favor? Will you go leave a five-star review for me on Apple or Spotify? It would really help. And if you want, even share this with a friend. so through the great recession you were off the grid we were off the grid and i i moved up there i still was under the impression that i could be a builder i was gonna because i saw these these builders and like they were building custom homes and the only person making any money was the developer right like all the all the contractors were fighting over scraps and i thought i'll just go to steam out and i'll build a house every year and maybe make a couple hundred thousand bucks and I'll be happy and that was 2007 and that was the worst possible timing what did you sell your business for sold the business for right just under a million I walked with like because I had some debts and stuff we had to pay off equipment I walked with like 690 or something like 650 or something which was a lot in 2007 was a lot of money and dude that's what I was gonna say is like well and especially for a first exit like that's that still and again no entrepreneurial instincts i had no idea my parents were both wages their entire lives and so we bought a house and thought i was i bought a lot i was gonna build on it did you put all the money into the house like did you pay cash well no we got a loan but it was weird because certain banks wouldn't even loan on it because they're like oh you're not connected to the grid there's no electric meter we can't find weird like makes sense yeah what does it make We can't finance this house.

20:12There's no electric meter. I don't, what? It's still a house. That's an underwriting criteria. Yeah, no, exactly. So what did you do then? Like, okay. Cause I could see that you go out there. There's no building going on and you weren't entrepreneurial, like you say, but I picked you have some money. I had, I had a little bit of a, a nest egg. My wife worked and I picked up a book called the four hour work week. and that book changed everything for me because all of a sudden you could make money wherever you were and there was no jobs there was no business to run at steamboat at the time everything was in a complete crapper so so i bought a website after that it happened to be about solar power because i was learning that really well living with it every day started selling solar kits and stuff like that and then i had a bunch really yeah i had a bunch of health issues at the same time too my digestion, probably all related to my stress levels.

21:05I had a bunch of digestion issues, energy and all this stuff. I went to doctors. They couldn't ever figure anything out. And this is 2008, 2009 is right when Google and social media really is taking off. And it's finally, you could get real information from the web. Before that, it was really sketchy and unreliable. And so research on my health issues and started a health business, started selling health supplements. So that was, that was how I transitioned to an e-commerce health business. And the e-commerce business has been around ever since. Yep. What kind of supplements are you selling? So we've got CBD stuff.

21:42We've got blood sugar stabilizers and we've, we've got pure xanthan is my favorite thing. Cause it's like sunscreen and a pill take this stuff and it's an antioxidant. It's great. It's what makes salmon pink. So it gives your skin some pigment and it, It really nukes the antioxidants. Been doing that for 15 years. And this year, actually this weekend, we're launching a telemedicine business. We're going to be prescribing things like temaglutide, which is basically ozaminate. There's GLP-1s. GLP-1s are hot. We're going to be prescribing those. TRT, HRT. There's a big demand for ivermectin and EPC-157 and all that stuff.

22:22So it's a big shift for us into kind of a Western medicine. Well, the reason I love these businesses is because, and you saw with the supplement business, there's a big disconnect between the brainiacs who are like, oh, if we just affect these molecules, oh, I know CRISPR gene editing, I know how to do this. And actually getting it in the hands of people who need to use this stuff. And that's where entrepreneurs step in and say, wait a second, you can lose how many pounds? How many years to your life does it add? I could sell this, right? And so entrepreneurs come in and they figure out a way to actually get it into the hands of people.

22:52I think the inventor of Ozempic, is it Novo Nordis? Yeah. I think that's their name. Novo, yep. Their stock has kind of been hammered. It has. Because they weren't able to effectuate the type of distribution they needed that people thought they were going to get. Because people like you were like, I actually think we could manufacture these off-label and have the same outcomes and get it in the hands of people. So to me, this health stuff is kind of, if you're interested in it in particular, it's a gateway drug into entrepreneurship. because people need it. If you can figure out how to get buyers and sellers together, whether that's through an e-commerce store or whether that's through a platform with physicians who are making writing prescriptions, I just think it's freaking fantastic.

23:30I totally agree. And after my first business, which is basically like digging and laying concrete, which neither one of those have changed in like 150 years. After that, I decided I want to be on the nose cone of the rocket. Like I'm going to be whatever is taking off. That's why we got into CBD. And that's why we're getting telemedicine. And I asked Chachibiti like a year ago, I was like, you know, what's it? What's going to be the annual growth rate for telemedicine? And it was like 26 % annually. All these people, especially in our generation, right, that are kind of sick of the doctor thing, right?

24:06If you can get an appointment in the next three months, you go in there, it's 10 minutes, you're gone, right? And you don't have time to really talk. And frankly, it's embarrassing to talk about if you need Ozempic or if you need some hair growth formula. Or if you're really worried about your testosterone levels, like that's really hard to do. It is. I was just talking to somebody about this. Functional medicine is the way that they talk about it. Where typically when we go and see a primary care physician, it's, and primary care physicians are fantastic. They're wonderful people. They're good doctors.

24:36They're good hearted people, but they're not necessarily looking at it holistically. And they're not necessarily collaborating with an interdisciplinary team that is helping you find the right things for you. So I love these businesses. is it's adjacent to what you're doing. It's not exactly what you're doing, where I could pay 10,$20 ,000 and I just go get all my blood tests once a year. I do all of my panels. They tell me about my genes. They tell me about, you know, I do a stress test on my heart. We do an MRI, everything. And it gives me peace of mind. But then I also go talk to a dietician and I talk to a specialist if there's anything that's wrong or a geneticist that tells me kind of, hey, these are the best foods for you at this time of day, et cetera.

25:14Because we want better recommendations. We want better access to healthcare. So I freaking love that space that you're getting into. What was your first deal for car washes? You're doing all this other stuff. How the freak were you like, I'm going to go ahead and buy a car wash? Cody Sanchez? Well, a little bit. It was actually Nick Huber talking about the self-storage stuff. Oh, that's right. Yeah. I was like, well, let's look at the storage. And it was so overheated and still is in a lot of ways that I was like, well, that doesn't make financial sense at all. but why that space you didn't even know about the the tax benefits of it so that's a great question i was we were we were making money hand over fist during the pandemic because everybody all of a sudden was stuck at home and really about their health and so they were buying supplements and we actually found one of our manufacturers had masks at the time and so we were in may of 2020 we were the only e-com suppliers in the country who had masks so we were just shipping them like you know 2020 was a good year it was a really really good year and so i was looking starting then in 2021 i was looking i was just kind of bored i was like you know the e-commerce thing is great and it just doesn't take a lot of time it's still only like a 20 hour a week gig for me i was just like i need a little something i need some juice like i was mountain biking a lot and i was snowboarding a lot and i was going to the gym all the time and i was bored i was like I need something to do, a little side gig that will make some money.

26:47And so the real estate thing popped up and all the guys talking about commercial real estate, it finally clicked for me. This is the breakthrough for me, Nick. I realized that my online business, if I really grew it, really did a good job with it, if I sold it, I could probably get a five to eight X multiple, right? That's probably a really good outcome for an e-commerce business. Most people be lucky to get two or three X. I was living in this car wash. I was like, wait a minute, he's getting 10 X for this crappy. I mean, this place is a dump. And I thought that's, that's what shooed me away for the, for the first year.

27:26I was like, the hell with that. They don't even know how to, how to value these things are crazy. And then I realized, wait a minute, I could go in there and double that business. And then it would be 10 X that the value on it it's finally flipped that these multiples work in your favor if you grow them if you grow the business you just went full cardone you're like dude i just got 10x my mindset my 10x this 10x literally 10x everything the phone is like this is way better i remember the first time i converted a cap rate valuation to like a multiple where because a lot of the commercial properties they're they're valued off of a cap rate and so it's like oh it's a hundred thousand dollars a year at a 10 cap and so what a hundred thousand dollars a year at a 10 cap is a 10 expected return yes so effectively you just divide the hundred thousand by 10 and you get a million dollars and i was like wait a second wait a second cap is a 10x multiple yes are you freaking kidding me which means that one day is like a 15x multiple yes yes i'm like these ones down the street remember when interest rates were at zero and there was like four caps yeah they're like oh yeah this this uh dutch bros is so good you could get in for a four cap and you're like what the freak this is like a 20x business like more than 20x yes and just insane yeah so for you that was like that was kind of the aha bro i thought these real estate guys were there were nuts you're getting six percent of your money what are you doing you're an idiot and i realized oh wait a minute if you go in you optimize the customer experience you improve the customer experience you improve the signage, you improve the Google ratings.