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Welcome to Financially Fluent with Ray Godleski from Southeast Wealth Partners, LLC. Whether you're already retired or planning for the future, navigating financial advice can be overwhelming. This podcast cuts through the noise, bringing real insights from experts who specialize in every aspect of a successful financial plan—including how to adapt when things don’t go as expected. Join us as Ray Godleski answers audience questions and shares actionable strategies—not just empty clichés.
Ray Godleski (00:01.451)
Hey good morning everyone and welcome to the next episode of Financially Fluid. Today I'm very excited to have a CPA on with us, Josh Roper with Altruist. How are doing today Josh?
Josh (00:14.232)
Doing well, Ray. How were you today?
Ray Godleski (00:16.459)
Doing good, doing good. The date of this recording is May the 13th. So for you, we've made it past April 15th. We've it past May the 1st, but I guess you're still busy.
Josh (00:29.868)
Yeah, you know, it's a lot of extensions and just trying to get him out of the way. So maybe we can take a vacation this summer. So, but yeah, we're still staying busy.
Ray Godleski (00:38.977)
Good deal. And have you been doing this for a while?
Josh (00:42.702)
I'll complete my 25th year this August. So I'm excited about that.
Ray Godleski (00:47.367)
Wow, that's awesome! Been doing it since you were 15. That's impressive.
Josh (00:49.262)
Yeah. I just look young.
Ray Godleski (00:55.159)
That's good. That's good. All right. Well, you probably have heard that most guests do answer trivia questions, but we'll hold that towards the end of today because I got quite a few things to ask and I think our audience might appreciate it. So I know while you have a specialty when it comes to who you tend to work with, kind of have knowledge that is in more than just the specialty area. So let's start right off with
Because a lot of people I talk to are business owners. Some might be what I call solopreneurs. They're just one person, or maybe it's two people that are married or have a kid in the business. And then, of course, we've got folks that have many employees. So one of the common questions that I come across is, when should I get an LLC? When should I file as an S-Corp? When should I be a C-Corp?
I mean, what are some things they might need to think about when figuring the answer to those questions?
Josh (02:00.982)
Sure, you know, like with a lot of tax questions, the answer is it depends, right? So in situation with entity selection, it depends on what your end game is, right? So if you're a small business and you want to
grow a business really quickly and reinvest all of the profits back in the business and sell it, then maybe a C corporation would be a good idea because they have a section 1244 election or section where you don't have to pay capital gains within certain parameters. So C corporation might be the way to go. If not, generally, you know, then if you're not going to be a C corporation, then you start with the sole proprietor.
and then work your way LLC into the S corp and partnership, et cetera, from there. So I'm not a big fan of the sole proprietor. I always believe in at least starting with an LLC. And then what a lot of people don't understand about an LLC is an LLC can be taxed five different ways. It can be taxed as a sole proprietor. It can be taxed as a corporation, an S corporation, a partnership. So there are a lot of different ways that you can do it. So I like to start people off with an LLC and then
There's a natural progression as their business grows on where the entity selection takes place, right? And there's a lot of factors that, you know, go into, into, into consideration. So what I like to say is, you know, start out with a single member LLC. And then once you get up to about 50 or $75,000, then we reevaluate and say, okay, is our goal still the same? Now is our goal to grow a business where we're going to take the profits out. Then that sounds like an S corporation election.
If it's a situation where we're going to reinvest and not take money out and just try to straight grow the company, that may be a C corporation, right? So there's a lot of different factors that play into it regarding situation and long-term intent. Does that make sense?
Ray Godleski (03:55.613)
It does. And so for the C-corps are out there, I'm guessing it has more to do with, like you mentioned, reinvesting profits, not necessarily headcount, even though as an S-corp you can't have more than 100 shareholders. for the C-corp, walk somebody through the tax implications, because we hear the, no, you're double taxed. But like you said, if you're reinvesting it, it might make sense. So can we walk through just the
Josh (04:11.02)
Right.
Ray Godleski (04:24.659)
Example of what the tax might be for someone running a C-Corp versus an S-Corp.
Josh (04:30.252)
Sure. Well, the C Corp, you know, even though you may own 100 % of the stock, a C Corp is special in that it's its own entity, right? So the C Corp is its own entity, just like a separate person. So as an owner of the C Corp, you're really just an employee of the C Corporation. So you're treated like an employee. So basically you give yourself a reasonable salary. Okay. So that's just like every other employee.
And then as the C Corp generates profits, the benefit about the C Corp is it has a low federal tax rate of 21%. And so that really allows people to pay the lower rate and reinvest that money back into the corporation. Now, if I wanted to take money out in excess of my salary, then I would have to take a dividend. And based off my income level, that dividend has certain tax ranges, but let's assume the max at 20%. So that's where your double taxation gets in is you get taxed at the salary level.
And then when you take dividends, you get taxed again at the dividend level. And that's where the double taxation comes in. But if you're in growth mode, where all excess profits get reinvested back in the company, then you avoid the double taxation and you're singly taxed at the salary level.
Ray Godleski (05:38.071)
Okay, yeah, from what I've heard, when 2017 tax cut came out, know, the C-corp became attractive again because, what was it, 35 % and went down to 21%, is that about right?
Josh (05:51.03)
Yeah, but again, it depends on your intent, right? So if I take a C corporation and I'm in the max bracket from a salary standpoint, and then I take out dividends, okay, so the max brackets 37 % dividends would put me at 20%. That would put me at a 57 % bracket right on those gains. If I'm in a S corporation, then they'll cap out at 37%.
Ray Godleski (06:16.246)
Got it, got it. Okay, great. Let's move on to the next thought, is audit.
Josh (06:23.086)
I said 21 % and 20 % that's 41. Sorry, my bad.
Ray Godleski (06:27.135)
Okay, no worries. Audits is something people I think are probably scared of. so something that might be helpful for listeners is what triggers an IRS audit? What kind of documentation and record keeping tips do they need? How long do they gotta keep the stuff? If they have a CPA.
So I'm kind of going over a bunch of questions I understand, but if they have a CPA, how do they help?
Josh (07:03.426)
Sure. So for record keeping, a common misconception is, I gave all my documents to my CPA, so they've got them, right? So they just use them to prepare your returns. You should always keep your records. The IRS says anything above $75 is required for receipt for documentation. So the best defense against an audit is good record keeping. And in situations where if you ever do get an audit, there are several different kinds. There's a mail-in audit, box audit, in-person audit, right?
Ray Godleski (07:13.271)
Mm.
Josh (07:31.008)
just whenever you get a letter for an audit, I just recommend that you stop and contact your CPA and let them help you through that process. as far as red flags, there are several, you know, a lot of people like to do schedule C business income and, know, show losses every year. So that's a really big red flag being overly aggressive on, you know, your schedule ease. that's a big red flag. and then, you know, charitable contributions, they do look at that as well.
So those are probably the most common areas that will trigger red flags. But again, if you've got all the proper documentation, that shouldn't be a problem.
Ray Godleski (08:07.319)
I'm curious about the, you mentioned charity contributions. me, elaborate a little more on that if you don't mind.
Josh (08:15.372)
Well, if you have charitable contributions that are like large non-cash contributions, or if you have contributions that are disproportionate to your income level, then sometimes those will trigger red flags and they may be very legitimate. could be a carryover from a prior year or something, or maybe, you you took a required minimum distribution and send it into a charity instead of taking the money. So there are other factors that can come into it. I've had a client that had a million dollar income.
and got audited for taking a $400 charitable non-cash deduction. yeah, it's just really, mean, and that was the only thing they questioned was $400 of charitable contributions. It was weird.
Ray Godleski (08:56.693)
You know, on that note is I'm always surprised how many people are unaware of being able to do a donor advice fund, especially in those years when they have great income. What a great time to, you know, add some money to a donor advice fund. Do you have anybody that uses donor advice fund?
Josh (09:16.428)
I have several clients. So I have some clients that charitable giving is paramount to them. It's very important. So they give 10 % of their income every year, regardless of what it is. I've seen them do $200,000 contributions. And so what we did several years ago was set up a donor advice fund. And then that allowed them to get the deduction in the year that they obviously wanted to make the contribution.
but then let those assets grow until they decided where they want the money to get allocated. So if you're a high income earner with charitable intent, I love donor advice funds. I think they're a great planning tool.
Ray Godleski (09:53.959)
I'll explain that just in case there's someone listening that's unfamiliar. On a donor advice fund, you're putting the money in today, getting the tax deduction today, but you control when the money goes to that particular charity and doesn't have to go to just one. And a lot of people like that because who knows, right? The charity that you're in love with today or the church or whatever.
It's possible that that changes, right? And all of a sudden their values are different than yours. And so you're not kind of like having remorse, if you will, and you can change who the beneficiary is of that charitable donation. Am I on the mark when I put it that way?
Josh (10:41.506)
Yeah, yeah, yeah, yeah. And I love it. Like I said, if charitable intent is important to a client, they're great tools and the great tax planning tools.
Ray Godleski (10:50.355)
Okay. And I'll say one more thing on that just for folks listening, know, qualified charitable distributions. You know, that's where the individuals that are 70 and a half or older can take money directly from their IRA and send it to their charity. Do you ever see that get messed up or most people doing that right?
Josh (11:16.654)
I've only seen it a few times. You know, I joke with some of my clients that, know, the age of the clients typically follow the CPA. So a lot of my clients aren't in the RMD stage yet. But yeah, we do use it on occasion.
Ray Godleski (11:28.983)
Bye.
Well, lot of your clients are paying estimated taxes, self-employment taxes. Do you want to share some tips on how do they avoid penalties? How much are those penalties? And just kind of how they should estimate their quarterly taxes.
Josh (11:49.55)
Yeah, you know, so it's the good thing that the IRS allows the estimates to be paid in arrears, right? So the calculation is made off your prior year tax. So they go, okay, if you meet the threshold of more than 150,000 in income and a greater than $1,000 tax liability, then you're required to make estimated payments. And that's the either 110 % of your prior year liability or 90 % of your current year liability.
So what I always tell people is, you know, we calculate the estimates for them based off of their income, right? So let's say that you start a business, you make a hundred grand, you owe 40 grand in taxes. You're not going to get underpayment penalties and interest because it was your first year. But what they'll say is, okay, next year, because of your income level this year, now you have to make estimated payments. And if you don't, we're going to charge you underpayment penalties and interest. So historically they've charged you about 3%. So if you fail to pay it.
It was a 3 % interest rate. not very, not very big burden, right? But in August, 2023, no one was paying their estimated taxes. So the government said, wait a minute, we need some cash. So we're to bump that rate from 3 % to 8%. And so now where you see people who historically were a little more lackadaisical and making the estimates, it's really more important to make them now because, you know, that's a, that could be a big number at the end of the year for underpayment. So.
Ray Godleski (13:05.738)
Mm-hmm.
Josh (13:12.974)
I would always recommend paying the estimates based off the advice of your CPA, right? Again, it's based off the prior year numbers and you know, the 110 % safe harbor provision is in case your income goes up, right? So you always want to make your estimates, but what if you're in a situation where your income is going to go down? So remember it's 110 % prior year, 90 % of current year. So what I tell clients is, okay, when I give you the estimates in April, go ahead and make the first two quarters, right? And then...
Ray Godleski (13:32.695)
Mm-hmm.
Josh (13:39.618)
We started our tax planning process in August. So if I get to a client in August and their income's gone down from the prior year, something happened, significant event, maybe sales just were down. They hired some more employees and you know, just the income dropped overall. Then maybe we say, okay, maybe you make the third quarter and you skip the fourth quarter estimate. And that way we can still get them in that 90 % threshold to where they're not getting payment penalties and interest. And then they don't have to overspend or overpart with their cash. Does that make sense?
Ray Godleski (14:09.719)
Now, if someone is making contributions into a 401k or a cash balance plan, does that help those numbers?
Josh (14:21.834)
Absolutely. There's a couple of tricks, right? So that's part of your tax planning, right? So if we said, okay, based off of your income level, you're going to be a little bit higher than last year. So basically that means you would make your scheduled estimates, but you say, okay, we've got some free cashflow accumulated. We want to make a hundred thousand dollar profit sharing contribution. That's going to lower.
our income and get us below that 90 % of prior year, then yeah, maybe you make the profit sharing contribution and skip the fourth quarter estimate. For smaller solopreneurs, small S-corps, a good trick is if you don't make your estimates, right, or basically for your S-corporations, if you don't make your estimates, at the end of the year, you can run W-2 wages, run yourself a bonus, withhold it all. So let's say that
Ray Godleski (14:55.319)
Hmm.
Josh (15:13.676)
You know, you were supposed to make $75,000 in estimates all year long and you didn't. Then you run yourself a $85,000 W-2 and then withhold $75,000 to the federal government and they'll give you credit as if you've paid that in all year long. And then you can avoid that 8 % under payment penalty and interest.
Ray Godleski (15:17.589)
Mm-hmm.
Ray Godleski (15:31.859)
Excellent, excellent. Okay, awesome. Now another hot topic is, you know, home-based businesses which exploded, you know, with the pandemic and it's continued. So let's kind of just go over some of the myths and facts when it comes to home office deductions. And then I have a follow-up question from that.
Josh (15:53.774)
Sure. Home office deduction is not going to change your life, right? So a lot of people get excited about it. I'm not a big fan of it per se, right? If you truly have a home based business, because what happens is if you have a home, you get a $500,000 exclusion on the capital gains on the sell of that home if you're Marry, file and jointly. If you have a home based business, now you've just entangled that into a profit into a taxable situation, right? So, but you know, nonetheless, if you have a home based business, be realistic about it.
Be realistic about the expenses that you're claiming that are used to operate the home business. So repairs and maintenance are still an allocated percentage, but if you go redo your backyard and put in a pool, that probably didn't affect your home office. You see what I'm saying? So you might not want to include that into the allocation and deduction, right? But just be very reasonable about it. And again, record keeping is the key.
Ray Godleski (16:36.469)
Alright.
Ray Godleski (16:50.015)
Okay, well, how about depreciation and equipment write-offs? Are you seeing some poor execution there or does everybody tend to get that right? And go ahead and elaborate onto the cars as well, if you don't mind.
Josh (17:04.588)
Yeah, so if you have a home based business now, that's depending on your business, right? So there's a bunch of different, again, with taxes, it's always depends. So with depreciation, you're going to depreciate if you're using 100 square feet and you've got a 2000 square foot home, you're going to be depreciating 5 % of your home annually, right? It's not going to shake the Richter scale. And then when you sell, have to recover, right? So you get a little bit of depreciation on that. If you buy
equipment for your office, printers, computers, those, I would not include those home office expenses. I would include those as business expenses, right? So I bought a printer for the business, brought a laptop for the business. I would write those off through the business. But if I go buy, you know, a new bookshelf build out for the home office, then really, yes, it's for the office, but it's still part of the house. So it still goes in the percentage of that.
Ray Godleski (17:40.439)
Mm.
Josh (17:56.238)
So a lot of people miss the depreciation on the house and then are overly aggressive on like stuff like repairs and maintenance and Addition home additions and luxury items stuff like that. Does that make sense?
Ray Godleski (18:08.331)
Hmm. does. does. What about those business vehicles? You know, some people like to do the special bonus appreciation. Other people like to track miles. When do you, from a recommendation standpoint, when do you find it makes more sense for like what type of vehicle or what kind of mileage for someone like, just write off all the miles versus, you know, getting that big
special depreciation or an amortize, amortize, amortize this, yeah, you say that word all the time, depreciation over a period of time. What's kind of the analysis on that?
Josh (18:40.897)
Amortization.
Josh (18:51.054)
Well, again, it's an it depends situation, right? And it varies for every business. Let's say that I have a home cleaning business and I've got a little Honda Civic. I drive all over the city to go clean homes. I probably would want to do that on mileage, right? I'm going to drive 30,000 miles, get about $16,000 in deduction, right? And a Honda Civic probably cost 20, $25,000. So you could get $16,000 in deductions every year. You see what I'm saying?
Ray Godleski (18:55.543)
Mm-hmm.
Ray Godleski (19:03.037)
Mm. Mm-hmm.
Ray Godleski (19:11.959)
Mm. Mm-hmm.
Mm-hmm.
Josh (19:17.196)
So, but if I'm a construction contractor and I need a truck for a super and it's December and I made a million dollars, I may want to write it all off in December because I can get a 42 % savings on it. So it just depends on the business. Real estate agents are the same way. They drive a lot, right? So mileage may be more appropriate where again, another construction company or another small business landscaping company.
they would probably take that truck and ride it off in the current year, maximize their tax savings, and then take the advantage of the time value of money and reinvest that tax either back in the business or take it in distributions.
Ray Godleski (19:57.175)
So I'm curious on that, so let's say somebody does the big write-off and after three years they are just, whatever reason, they're bored with the car and they want to get another car, whether they sell that car, trade it in, give it to a family member, are they gonna have to recapture some of that depreciation?
Josh (20:15.37)
If they, it depends. Okay. So again, depends on how they appreciated it, right? Bonus depreciation is typically not recapturable. If they did 179, then yeah, you would have to recapture a pro rata share of that. but you know, either way you're still going to pay the majority of the game because whatever you sell, like if you sell it, then you're going to have a game because you've got no basis. And if it's not, and if you just gift it, then yeah, you'll have to recapture some of that because you've disposed of it too soon.
Ray Godleski (20:42.999)
Okay. Now you mentioned real estate and I got clients that are realtors. just recorded another episode the other day with a top realtor in the area. So a lot of people are in real estate investments, right? And so let's just kind of give an overview of kind of the depreciation, passive income rules. I think you and I can both talk about 1031 exchanges, but let's kind of start with the depreciation and passive income rules.
Josh (21:13.262)
Are we talking about like if I have a residential rental property or commercial rental property?
Ray Godleski (21:18.039)
Yeah, yeah, just, yeah, maybe you got a single family home and you're renting it out and you've been renting it out for years. Yeah.
Josh (21:25.71)
Okay, so that's very common, right? So we have a lot of clients that maybe they rented out their first home instead of selling it. So what happens is, if I have a W-2 job and I go to that job 40 hours a week and I have this single property that I'm renting, that means my real job is this W-2 job. I'm not a real estate agent. So any income I earn off of that property is what's referred to as passive, right?
It's income that I'm getting. I'm not actively involved in the business and I'm not doing much to get it. Right. So that's really passive income. Again, where my W2 job would be my active income because I am physically participating to get that income in. Right. So they're taxed in different ways. So and it's a major misconception. The income is taxed basically the same. Right. It's the losses that are treated differently. So, you know, the benefit of a single residential property is that you're hoping that it's
Ray Godleski (22:14.091)
Mm-hmm.
Josh (22:22.008)
tax negative with depreciation, but cash positive, right? That's the ultimate goal. But in a situation where it does start kicking off income or let's say that it's book negative, but cash positive, then we have a loss for that property, right? If my income is below a certain level, I believe it's $140,000, then I can take that loss even though that's passive income. If I'm above $140,000,
I'm not allowed to take that loss. just the threshold. And then that loss gets deferred until future years, until either I do have income, passive income to offset that loss or I sell the property. Does that make sense?
Ray Godleski (23:05.406)
It does, it does. And I guess the other thing too, if it's passive income, now that gets tricky too, right? If they're a realtor and they own some rental property, there's some different treatment around that property. Is that right?
Josh (23:24.03)
Yeah, you can imagine if you're realtor and you own several, then you're a real estate professional and then everything becomes active at that point.
Ray Godleski (23:27.179)
Yeah. Yeah.
Right, right. But if you're not and it's strictly passive, if you're trying, and let's say it was doing really well from a taxable standpoint, like it's making taxable income, and they're thinking, I could just, well, let me just open up a retirement account against that, that's not allowed, right? You can't do like on passive income. Right, but if you were like retired or something, you got pension, got social security, got real-time income, there is no way to really...
Josh (23:49.646)
No, you have to have your income. But you could offset your other income. I mean, go greater on the market.
Ray Godleski (23:59.927)
Well, there's not no way, but there's less ways to kind of offset that. And then the other thing that's trending, if you will, again, I think from the pandemic somewhat, is the short-term rental Airbnb income. Are those treated any differently? Are they pretty much the same?
Josh (24:15.702)
No, they're actually treated much differently. So they're treated like a small business. So short term rentals are all active. So active income, active losses where long term rentals are more passive.
Ray Godleski (24:19.799)
Hmm.
Ray Godleski (24:25.879)
Okay, okay. So if you hired a person to manage a property, that's just an expense and it's still, like you said, it's an active business. Yeah, and then you just hope the whatever ordinance that is there doesn't change their ways and doesn't allow Airbnbs anymore, something like that, right?
Josh (24:46.294)
Yeah, and that tenants don't destroy the property.
Ray Godleski (24:50.587)
Right, and which one did destroy it, right? You don't know. Okay, and then 1031 exchanges. Let me back up for a sec. Just so that the listeners know, you kind of said this earlier, if you're doing a, if you're married file jointly and you sell a property or primary home, you've got to live there at least two of the last five years, and it's a beautiful thing. You get up to $500,000 of capital gains tax free.
Josh (24:59.31)
Sure.
Ray Godleski (25:19.921)
And then if you made $510,000, it's my understanding not that bad. You're paying capital gains on $10,000. Now talk about federal, is that fair?
Josh (25:28.204)
Yes, that's accurate. Correct.
Ray Godleski (25:30.135)
Great, great. But now 1031 exchange gonna come into play on a investment property. So kind of walk us through that if you want to.
Josh (25:38.734)
you
It used to be for business use assets, right? So, and that included both real property and personal property. Real property is real estate, personal property is everything that's not real property, right? So in 2017 with the TCJA, they took away the 1031 for personal property, right? Like a vehicle that's personal property, I would go trade. And now it's only applicable to real property. So if I have like the residential house that I'm renting out, and let's say that, you know, it's appreciated very well.
Ray Godleski (25:59.671)
Mmm.
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