Lower Your Taxes Legally - Part 1

His Shron Trubots are welcome back to the Business School podcast in this episode. I'm going to tell you about how to lower your taxes legally. Because most people, they just want a loophole. They want a shortcut. They want a magic trick. And they're like, "Hey, as December 31st, I feel like I paid too much in taxes this year. What is one thing that I can do to just magically do some pixie dust sprinkling on my thing that will get me to reduce taxes? That's not how it works." I spent the last 15 years figuring out the taxes of the number one drag on wealth creation. And I came up with a matrix called the Tax Advantage Matrix. There's three very specific levels on what you can do to dramatically reduce your tax pool. Well within the law legally. And that's why I love putting this information out. Because I know that if something ever happens, someone's going to point to this and say, "Listen, Shron, talk about that." And I'm like, "Yeah, talk to your CPA, but you should listen to this idea because it gives you enough information to have a good conversation." And this episode, I'm going to break down part one of how to lower your taxes. And it all starts right now. [Music] One thing is for certain. Just because it's tried and true doesn't mean it's working right now. So the big question is this, where can you learn what is working right now? The strategies, the tactics, the psychology, and the exact how to. How to go your business. How to blow up your personal brand and supercharge your personal growth. That is the question. And this podcast will give you the answer. My name is Shron Tribata and welcome to Business School. [Music] Taxes are the biggest drag on wealth creation. There is nothing, nothing that reduces your overall income and your overall wealth more than the amount of taxes that you pay. But the crazy part is that most of us don't realize that taxes are somewhat avoidable. I'll give you a stat that I know of. Roughly there's 60,000 pages in the US tax code. And I think less than 3,000 of them are on the type of tax and what you're supposed to pay. The rest of it, called it 90 plus percent, is based on how you can actually avoid those taxes. Meaning taxes are just entirely based on an incentive mechanism. It doesn't penalize you for the income that you make. It is all about the incentives and the behaviors that you can use with your money that you are in partnership with the government overall. So in this episode, I want to kind of break down for you. The thing that I call the tax advantage matrix. It shows you how to systematically reduce your taxes by doing things legally, which is you need to know the law, you need to follow the rules, and you need to document the truth. And if you did that, it is the smallest amount that you can pay to get the largest amount of return, the largest ROI ever. And most people are like, "Man, this is math. So I want to stick my head in the sand." But I will tell you, if you, there is nothing that you are working on right now that is more valuable than actually paying attention to something like this because if you can get a bunch of these things right, all the money drops straight to the bottom line for you. So let me explain overall. Most people think that paying less tax is about having some kind of tricks or a fancy advisor or scourting the law or having a loophole. And I will tell you, the wealthiest of wealthy people are not using magic. They are just following the law. And when you follow the law, you understand that it's just a bunch of incentives. And they know like where they sit and they know the dials that they can move to get them to keep more money because it's not what you make it to what you keep. And this is why I built this, actually built this for myself because I was like shocked when I started making more money. I was like, "Man, how am I writing this big a check to my invisible partner or the United States government?" And by the way, I am the happiest person to pay more taxes. I want to pay more taxes. I want to pay all the taxes that I can that I'm only legally obligated to pay. I only pay that I stay within the rules. I only do everything by the rules. So I always say no the law follow the rules, document the truth. I don't try to like, I'm not trying to be aggressive, I'm only doing what the rules say that I can do because that's what the government said that I can do because from an incentive perspective. So let me explain to you as you're listening to this episode the tax advantage matrix. The tax advantage matrix is nine pieces is three levels overall. And today I'm just going to break down level one for you because once you understand this you will instantly drop more dollars to the bottom line. So level number one is to lower the tax bill. Level number two is to design the structure that keeps you operating more to keep more money. Level number three is to then transfer the wealth that you make to yourself, next generations, other things like that. There's levels to this game. So let's talk about level one today because it will have the instant and most immediate impact on you. So level one is to lower the bill. And the goal mainly for me is to say, Hey, how can I lower the tax on this year's income? Well, what does that mean? Well, there's three ways to do that. Way number one is deductions. Way number two is incentives and way number three is timing. All right. In deductions, incentives and timing. Please let me explain what each of these means. So let's first take deductions. A deduction lowers the income that you're taxed. Right. So the main idea here is that it lowers the income. So if you are taxable income is a hundred thousand dollars, a deduction, a ten thousand dollar deduction provides you the ability to lower the taxable income. Therefore you pay less on the overall base. Right. So if you got a ten thousand dollar deduction and you had a hundred thousand dollars in taxable income, now your taxable income, a hundred thousand minus ten thousand is now 90 thousand. So your taxable income is now being reduced by 90 thousand. You didn't get a ten thousand dollar check. You were able to reduce your taxable income by ten thousand dollars. By the way, it's really good. For example, there's many ways to reduce taxable income. Let me give you some examples. Number one, retirement contributions. So if you don't, if you put, call it $7,500 in your IRA, well, that's $7,500 reduces your taxable income dollar for dollar and still grows tax free. There's something called the HSA, which is the Health Savings Account. If you put $10,000, I don't think you can't, it's like $8,000 for a family, I think, into the Health Savings Account, it reduces your taxable income dollar for dollar. If you do the Augusta Rule, it reduces your taxable income dollar for dollar. If you're hiring your kids in your business, it reduces their income dollar for dollar. If there's depreciation or cost aggregation, what it does is that you have, it reduces your taxable income dollar for dollar. So that's why box number one on this is deductions. What are the deductions you can take so that you can reduce your taxable income dollar for dollar? Because at the end of the day, if you have a hundred thousand dollars with a taxable income, you're paying taxes on the hundred thousand dollar base. If you have zero dollars with a taxable income, you have zero dollars in taxes, right? Because you don't have any taxable income. Everything that you pay in taxes from an income perspective is based on taxable income. And we want to do whatever we can to reduce and deduct from that taxable income. I'll give you an example. So here, you may say, well, sure, that's cool, but give me like a actual operating example of this. So there is the Augusta Rule. So if you don't know the Augusta Rule, the Augusta Rule comes from homeowners in Augusta, Georgia, renting their home during the master's golf tournament. And they would just, because the masters in Augusta happened and they didn't have enough housing there. So people would just leave for the week or 10 days and rent their home. Well, the 10 to 14 day period, if you rent your personal residence based on this rule for up to 14 days a year, that rental income may be tax-free federally speaking. So you could get you, you don't have to pay that. So for example, let's say you lived in Augusta, Georgia and you rented your home for a thousand dollars a day for 14 days. That 14,000 dollars is not included in income, but you still get the $14,000 in cash. So a business owner, like you, may be able to rent your home to your business for real business use, like meetings or planning or off sites or what have you. You're doing it anyway. You're taking them to dinner anyway. You're taking them to drinks anyway. You're doing a cocktail party anyway. You're having a meeting on an offsite anyway. If it's a legitimate business expense and you can rent your house to the business, just like you would have had to rent go rent a conference room somewhere or go rent an offsite location somewhere, the same comparable rate that you can pay, you can, the business can pay you. And of course, the rent must be fair market value. The business must actually propose the purpose of the business should actually be real. You can't fake anything. You have to know the law, follow the rules and document the truth. And the documentation has to be clean. You need a lease agreement between yourself, which is your business and your, your whoever owns the house, like your trust or your spouse or you. And then there has to be a market value of rent paid for that day. And it has to be for the entire use of the facilities because if you did not use that, you would go use some of the facility, right? The cool part here is that think about the power in this. The business pays you as the homeowner, call it a number, call it a thousand dollars for the day. The business gets deducted as an expense. You get to take it as income, but you don't have to report it in your tax return. So you get the 100% of that in income. It's pretty amazing if you can do that because just like it was signed into law by the Augusta, but for the masters, you now get to do this. And the dollar for dollar deduction is completely there because you get to keep 100% of that revenue, right? Which is super cool. My question is if you have not done any of this and you actually like entertain guests and you actually use your home for an offsite or you think you can use your home for an offsite in a legitimate business way, then I would ask your CPA, hey, can we use this Augusta rule correctly this year and what records do we need? What planning do we need? If you do it one time, it completely changes the game for you. So that is an example of like deductions as to how you can actually use deductions to reduce your taxable income overall. Here's number two, which is incentives. An incentive is the government rewarding behavior that it wants more of. So if a government government wants you to invest in R&D. So they give you R&D credits. The government wants you to invest in solar and electric vehicles. So they give you the solar credit. The government wants you to rehab historic locations. So they give you the historic credit. The government wants you to build low-income houses and they want to promote that idea. So if you invest in that, they give you low-income housing credit. The government wants you to grow the film industry and maybe the city of California wants you to do that too. So they offer you film credits. And the government wants you to put money away and give money to charity. So they give you credits for dollar for dollar of what you've actually given and deducted overall. They give you credits like the donor advice fund deduction. But that's a deduction, not a credit example. But it's an incentive, right? So I'll give you an example. The R&D credit. The R&D credit does not only mean if you have like lab coats and scientists working in your business, it just means that are you creating something from scratch, from scratch overall? Which is it can apply to when a company spends money to improve a product or a process or a software or something technical. Because when you do that, you're innovating on something, right? And when you innovate on something, there has to be some, there have to be stakes. If there are no stakes like a drug that a pharmaceutical company does or a innovation that a technology company does, there has to be real stakes in the uncertainty that the business is trying to solve. That's what the R&D is for. Now if the work qualifies, the credit may dramatically reduce your taxable more than the normal deduction. So you could actually say, hey, I spent a million dollars in R&D and you may actually be able to take more than a million dollars in credits because you're, they're incentivizing you for the behavior of developing something that is important for the economy. It's actually pretty cool. So you would hire a firm that would actually investigate how you actually put these R&D credits together and they would apply for you and then they would deliver the tax credit to you, which is amazing. So if you were asked you to CPA, I would say something like, hey, did we do anything this year that may qualify us for the R&D credit? And if we did, what records do we need? And then they probably will point you to a specialist. Now if you built software this year, if you're a software company this year, if you have developed patents this year, if you have developed some like cool engineering process this year, if you have built like a chemical this year, it's a super worthwhile because a lot of times it just sits on our balance sheet as IP, but you don't realize that the government wants to give you the incentive to actually do these things. Therefore, you can actually take credits associated with these things. And if you don't know about it, then you don't get to produce your taxable income, right? So number one was deductions, number two was incentives where the incentive that the government is rewarding behavior for that wants more of. And the last part of like how to lower your taxable is timing. Well, what does timing mean? Timing actually decides when your tax is due. And I will tell you in the tax world, deferring taxes is almost as good as avoiding the taxes. So if you could just keep differing. So if I told you, hey, you have this $100,000 taxable, I'm going to give you a chance to defer to next year. You're like, cool. I don't have to pay this year. And the next year comes around, you're like, you know what, you're on $100,000 taxable. I'm going to let you defer it one more year. And if I kept giving you a chance to keep deferring your taxes, it's okay, right? Deferring is almost as good as avoiding. And changing the timing of when the taxes do is a really great strategy in how you think about all of this because it gives you the cash today to make the investments today, to grow your business today, to reap the rewards today, so that you can then plan for the taxes tomorrow, right? A lot of this is related to say 1031 exchange. You have a building that you have appreciated in value or a piece of real estate, instead of selling it and paying the tax on it, you actually do a 1031 like kind exchange, which means that you roll all the gains from this into the new purchase of the new building. And so that purchase continues to grow. And you all know taxes as long as you continue to keep doing this overall. Now, sure, you don't get immediate liquidity, but you can do a refi. You can do other things without having to pay the taxes. There's something called taxable harvesting where you can actually reduce your taxes, where you do harvesting today, you take a loss, you bank a loss that you have, and then you are able to use a deduction that's still a deduction, but then maybe you can use it for later in the future. You can do Roth conversion in low years, right? What you're doing there is you're saying, hey, I have low income this year. I'm just going to convert my taxable income this year and pull the income forward this year, pay the taxes this year because I'm going to make more money next year, right? A lot of times people will just say, hey, you know what? I'm going to move my residents to Miami this year so that I don't, I'm in Florida, play Florida state taxes because next year when I sell my business, then I can defer it even more or not put the state taxes then. You're just thinking about timing, right? How can you manage timing in this overall? So I'll give you an example for a strategy that a lot of people don't know of. I call this, it is called the installment sale. So what is an installment sale? An installment sale means say you sell an asset, but you receive your payments over time. So let's say you have a piece of machinery, right? And you have that cost $100,000 and someone will buy it from you for $200,000. I'll say $150,000, you do easy math. So you sold it for $50,000 profit. Well, but the person that is buying it, if you wish, says, hey, I'll pay you $25,000 a year for the next X years until this gets paid off. Well, you bought it for $100,000. So the first $25,000 is just a return of capital. The second $25,000 is return of capital. The third $25,000 is return of capital. Four $25,000 is return of capital. So with this first $25,000 payment, you pay no taxes, right? So the fifth $25,000 payment, what happens? You don't pay the exact gain for the full $50,000. You only got a $25,000 with the profit because the payments come in over time. And therefore, the taxes also spread when you receive the actual payments. This is pretty amazing because you can avoid taking the whole gain in one year. This can be using when you're selling a business or a real estate or a machinery or a appreciation asset or what have you. You are only taxed in the year that you receive that gain, that you realize that transaction. So a lot of times what I will end up doing is you can sell, I'll give you the easiest thing that I've seen done. Let's say you're selling your business in Q4 of a year in the fourth quarter, like in October, right? You tell them and say you're getting $10 million for it. You can say, hey, I'll take $5 million in October and I'll take $5 million in January. Now the buyer is like, cool, no problem, right? That's, you know, maybe they say that's cool. I only have to come up with $5 million now. So they give you $5 million in October. So you pay taxes on the $5 million for that calendar year. And the next $5 million is paid in January, which is now kicked to the next calendar year, which gives you another 12 plus months to work that. Now, the tax may be the same, but you've deferred the payment of the tax by another 12 months, because in the tax world, deferrence is almost exactly the same as temporary avoidance, right? Which is pretty amazing. So the question I would ask you in this case is like, hey, if I sell this thing, can we structure it as an installment sale or can we break up the payments into two tax periods and how would that work on my taxes each year? The reason I'm sharing this with you is if you don't know, we all spend all this time with like, hey, how do I make more money? But it's not what you make. It's what you keep. And most people are like, well, and then on December 31st, you're like, well, how do I pay less tax? Well, it doesn't work like that. You need to understand this framework and this framework is the tax advantage matrix. Like it has three levels. The level number one is to reduce the bill. Level number two is to design a structure to keep more money in it. And level number three is to transfer the wealth. The three things in reducing your bill is deductions is incentives and timing. So when you do, when you have these pieces, it's very easy. Like when I look at an opportunity, I'm like, all right, do I, am I getting a deduction to reduce my taxable income? Is the government giving an incentive to do something that actually benefits them? Therefore, I get a break forward or timing. Can I just move the taxpayer around so that don't, don't owe the taxes today? So it feels small, but it can have a dramatic impact on your life and your business and that amount of money that you take home. In the next episode, I will start to, I'll break down the other two levels for you as well. So you can see that, but please know, you all, we all, all of us, all y'all need the tax advantage matrix because it's some of the things that are never taught in school because it's not what you make. It's what you keep. Hey, by the way, if you like this, can you do me a favor? Can you screenshot this and tag me the way I can make more like this for you? Please screenshot this and tag me and I make more like this for you. Hey, this is Sharan. I have an awesome free gift for you just for listening to the podcast. As you may know, I've got a chance to build two billion dollar companies. They're a hard way. So if you like this episode, you will love getting the exact playbooks from those wins. It's on my sub stack called My Next Billion. It has the exact frameworks I wish someone had given me when I was figuring it all out. Now you get the real lessons from the trenches as I go for a three-peat and build the next billion. So, everything's free at MyNextBillion.com. Please check it out. MyNextBillion.com.