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 need taxes because the value they're not worth is tied to stock. Some of them borrow against it effectively never actually been taxed. George Dimaff 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 a 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... There'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?

1:05That'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 the 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 millions. 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, this generating income, those are working rich. Those are people that are earning a lot of money, and many of them do get taxed quite a bit. There's some ways around that, and there's 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, apart from their net worth,

2:07is tied to their stocks. Okay, 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, a 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, and now all of a sudden they own millions of the stock and their 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, okay, 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

3:10more than that. I don't remember what the exact figure was. He said, okay, I don't pay enough tax. Here's $10 billion. And I bet you're going to misspen 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, and this actually is a rich versus strategy that anybody can take advantage of to some extent or another many 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, okay, 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

4:11a 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, they 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 this single most expensive mistake that smart people make around taxes? So there's a 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. So 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

5:16of 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, would use in cost segregation studies and using real estate as a strategy. Now, somebody that doesn't have real estate at all, okay, that might be a W2 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 push me to start my own thing. Honestly, I just stop 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.

6:21When we were gearing up for a product launch, Shopify is what made it actually happen. And when I'm traveling for the show, the business keeps running because the platform handles it. Two things, I lean on sidekick their AI, which helps me when I'd otherwise be stuck and shop pay the easiest checkout I've used. Your customers feel the difference. If a friend asked me, I'd say stop overthinking it and launch. You can be up and selling in a few simple steps. If you're ready to hear of your first sale today, head over to Shopify.com slash founder story to start your free child today. That's right. Start your free child today at Shopify.com slash founders story. That's Shopify.com slash founders story is offered by many employers. And even the deduction itself is the single biggest thing that we see employees simply not max out. And this is 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

7:25thing that we see smart people miss out on. Now, 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 like that. Everyone's a business owner. I'd just say contact us. We'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 step IRA or solo 401k. That'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 any online brokerage platform often allows this, which is called a

8:30Sep IRA SEP. S is in the same. He is an Edward. He 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 seller 401k takes a little bit longer and many of the brokerage is charged some underlying fees to administer it. But that's also something that you can set up by yourself. We can ask your broker to do it for you if you have stockbroker. 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 book keeping it. 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 don't know I'm still paying for that are doing a lousy job or not working at all. 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

9:31another major thing if you're a business owner, just simply self audit your own bookkeeping or have a trusted person. Now it is an extension of that. This is very crazy. I've attended lectures by Vern Harnish who does these scaling up 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 may be cutting invoices to a related party for work that needs to be done in the neighborhood. So we see that a lot but we see it in small businesses and me or size 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

10:32place 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 COVID. I think in 2020 is when it became kind of a news headline thing. So this has been a reality for a while now. People not really working a traditional job but maybe having maybe having more than one gig. Okay. So this is something that we've been seeing for a long time. And 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. 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

11:36don'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 off site place that's not your regular commute to your regular office if you even have one? How much is how much do 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 fake out 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. And I was easily dropping a hundred dollars a day on lunch. I didn't even care about that's what I made this walk to fuel. And this matters. It's not a shake on top of food. It's a complete meal instead of food. The black edition powder is 40 grams of protein mixes with water or milk in about 30 seconds and starts at it starts at less than

12:38$3 a meal 27 essential vitamins and minerals no artificial sweeteners colors or flavors. Keys be full for hours on the days I'm running out the door. There's the RTD bottle the grab and go version 30 grams protein seven grams of fiber under five dollars a meal. If you want to make healthy eating simple that's H-U-E-L get fuel today with my exclusive offer at 15% off online with my code founder at fuel.com slash founder new customers only thank you to fuel for partnering and supporting the show. All 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 PNL. So that's how people actually get audited is when they do really silly things like the common

13:40example that was all over social media a few years ago was this G-wagon deduction that somebody invented. Okay, that said that in what and the happening is people are 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 will 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 firstly you have to use common sense but that might not apply to everybody. Some people just genuinely might not know which is also okay. You gotta be careful when you go on social media right. You gotta 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 returns and see which one plays out best. These questions are best answered when you have when when you you know book sometime with your accounting professional

14:41and actually run the analysis. Now we have chat Upt you can ask them of course half the time it's wrong but it's something that you can you can run through chat Upt but then you can also you know book maybe an hour or two of an accountants time to run some scenarios with your data in there. It can always have us view this all the time. I 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. So that just reminded me of that. But to answer your question the

15:44most businesses I'd say you have to start off and make sure that you have the right structure. I could tell you some things that I've seen done before and these 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 how much it grows and then five years later when they sell their share and it's worth 25 million dollars all of a sudden they have a Roth 1099 distribution that says 25 million dollars taxable portion zero. So I've seen things like that. So that's could be questioned by the IRS but I've seen other things such as using an 83B election okay meaning that the they are receiving all of the shares at the power 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

16:45you know in the 40s. So we see things like 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 I mean quality work is always in demand and having somebody that is available is always in the mid. 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 it's the best fit for for somebody if if they are using mental health services so this kind of just all feeds into this 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 serves. I mean think about

17:47from 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 in other industry because I 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 to pursue passion careers things that they like and things are 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 I have a CPA license that on good terms resign because they want to start

18:52a completely different career whether it's in the medical services veterinary services mental health services just something completely unrelated to accounting so we see people just leaving the industry matter of fact there was an article that came out right during the covid years that said 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 what have you seen with other interviews that for baby boomers leaving like 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 and that are baby boomer age to get them to be able to set up trusts around the it's estimated 80 to a hundred trillion dollar wealth transfer that's happening between now and the next 10 years as baby boomers pass away so what I want to know is

19:55what happens to that wealth from a tax perspective I think that I'm kind of you know this 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 posted on social media that breakdown 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 so this is money that essentially got double taxed or 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

20:55depending on how much assets how much value and assets is being transferred but 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 in the state 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 I 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

21:55specifically and personal tax specifically and that's just because people need personal tax and it's extremely challenging extremely difficult and large companies don't want to touch personal taxes that you can't you can't charge much for them a client will get shocked at a $700 invoice well an attorney charges you know a five ten fifteen thousand dollar retainer just to get started in the case and with us you know our pricing you know expectation from society is extremely extremely low for a professional service and you think about hiring a professional service think about hiring an architect that's five ten twenty thousand dollars think about hiring an attorney that's five ten twenty thousand dollars any of these professional services but then you hire an accountant it's like a thousand dollars 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

23:01tax they 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 that this is why and often times it's simply a matter that they earned more and they would tell the less because of some change in their payroll department it worked 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 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 and so these are all the challenges that have many business owners that are accountants saying we're only going to focus

24:02on 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 business is oftentimes especially if the larger ones is the less of an emotional conversation so but we I'd say maybe we're brave we just take on these clients and you know there's 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 and 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 and I

25:08think a lot of industries right now are going through the the technology can do it for cheap but I've had really bad experiences with those technologies before and I think you you want to do it until that happens and then you realize you should have gone to to paying the service is going to be better for most first 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 so then the manager tells the operations team we need a on 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 train all the way back to the CEO and the CEO tells the investors and they say well I'm not going to invest

26:12in 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 this is 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 okay you gave me my dollar 22 cents back for the sauce I 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 a cloud or whatever whatever software my internal account 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 turbo tax turbo tax is a very good tool for people that have a simpler tax situation when it gets more complicated that's they they just need professional help when you think about the ability to scale was there a certain marketing strategy

27:13that you use to acquire customers I'd say the best thing is to provide an amazing customer experience I'd say that's the number one most important thing for any service-based business regardless of what the service is anywhere from you know a good friend of mine owns a construction company doing custom home renovations and it comes down to the exact same thing it's remarkable how similar our businesses are and I talked to my friend you know a few times a week about business and it's it's almost as if we own the same company because it really just comes down to are you providing an amazing client experience if they do an amazing job under this person's kitchen renovation they'll get hired for the bathroom renovation they'll get hired for the facade they'll get hired for the screened and portrait deck and it's the same thing with us if we do an amazing job and somebody's business setup will become their accountant hopefully for many years for their small business or their personal returns a lot of people say entrepreneurship is a really lonely place how do you find other people that you can relate to that you can bond with I recommend to anybody to

28:18join a network such as and I'm not talking about the the lead referral networks because those are always a little bit pitchy and a little bit kind of they just feel a little bit for me I've never enjoyed those but I'm talking about ones that are I guess more intimate where you form relationships with other business owners things such as entrepreneurs organization vestige or for people that are higher income ypio young presidents organization so these are all ones that some of them have an income requirement I believe for EO it's one million and I believe for ypio it's 15 million per year revenue but many don't or many have smaller ones or there might be entry programs into those so I recommend joining one of those because you are absolutely correct it is extremely challenging being an entrepreneur where every decision you make you have skin in the game so yes that's a very relevant question you're correct about that George thank you so much for today I learned a lot I learned a lot like you said you can't just ask so in these questions if

29:24I ask AI it will probably give me the wrong information and you you need the experts to talk to so George deem of always great chat with you and thanks for coming on the show amazing thank you so