Real Life Planning Podcast Episode 46: Tax Planning for Real Estate Investors with Michael Law, CPA

In Episode 46 of the Real Life Planning Podcast, Cynthia Meyer, CFA®, CFP®, ChFC®, interviews Michael Law, CPA, specialist in tax compliance and consulting with small business, real estate, and stock compensation. Michael Law has Masters in Taxation and 25 years experience, and prioritizes researching and finding solutions for clients. Michael shares the tax strategies every real estate investor needs to know, including understanding real estate professional status, avoiding common tax mistakes, and planning ahead for 1031 exchanges. This podcast is for educational purposes only - please consult your tax advisor.

" Tax is just reporting what happened or how it happened." – Michael Law

This Week on Real Life Planning Podcast:

Takeaway Quotes:

" It's better to have a business account and only use that account for business purposes." – Michael Law

"  It seems to me over my as a financial planner that most people dislike taxes, or they are suspicious about the tax preparation and filing process." – Cynthia Meyer

" A lot of people think once you get into the next bracket, all of your income is taxed to that bracket and that's not true." – Michael Law

Connect with Michael Law, CPA:

• Facebook 
• LinkedIn 
• Website
• Email: info@csandcompany.com 

Connect with Real Life Planning:

• Facebook 
• LinkedIn 
• X 
• Instagram 
• Pinterest 
• Email: podcast@reallifeplanning.com  

About the Real Life Planning Podcast

Hosts Cynthia Meyer and Vekevia Tillman-Jones explore practical steps for real estate investors to build financial freedom and make working for someone else optional.

If you like this video podcast, consider joining Real Life Planning’s Question of the Week where our CERTIFIED FINANCIAL PLANNERs™ and rental property business owners  answer the most common questions about real estate financial planning direct to your inbox.

Episode 44 Transcript

[00:00:00] Cynthia Meyer: Welcome to the Real Life Planning Podcast. I'm Cynthia Meyer with Real Life Planning and today we are talking to Michael Law who is a real estate savvy CPA and tax advisor. We've worked together for a long time, Michael and I, and so I'm very excited to bring his insights to you today. I think you'll really enjoy it.

[00:00:22] Michael, thanks for coming with us today.

[00:00:24] Michael Law: Thank you for inviting me to be part of this.

[00:00:26] Cynthia Meyer: So to get started, what's important to know about you?

[00:00:30] Michael Law: Well, I've about 25 years as a tax preparer. I've got experience in real estate and stock compensation planning for those in community property states, understanding how to allocate income between spouses, if a married filing separate return is beneficial or not.

[00:00:49] I have a knack for research and that has helped me so many times. And I enjoy it. I actually love taxation. It's funny. A lot of people fear it. I actually really enjoy it.

[00:00:59] Cynthia Meyer: So, how did you get started in your career in tax? And how did you end up being so, proficient in in these types of specialty areas of tax planning?

[00:01:10] Michael Law: Over the years, I've worked for a number of different firms and each year I've learned something new. So I started out at KPMG, one of the international accounting firms, and there I had worked on many clients that had stock compensation plans and learning to plan for restricted stock, ISOs, RSUs, non qual stocks and so every year I was learning and adapting and learning more things. I just became specialist in helping individuals and small businesses. And then I've just grown from there. And every year, learn something new, add that to my quiver as far as ability to serve clients. I just really loved it.

[00:01:47] I really never planned to go into tax. So this was the kind of the funny start. I was taking calculus. I was taking these heavy math classes. I got put into physics class and I had no underlying training in school, in high school and college with physics and I just couldn't handle the physics part of it.

[00:02:05] And I'm like, no, I'm not going to be an engineer. I just can't handle this. And at the same time, I was also taking some computer programming classes. And there I looked around and said, I am just not the same talent level as everyone around me. I can't compete with them. And so, although I like the accounting program and learning how to logically lay out a problem, I realized I was going to be outclassed very quickly among others that were much more talented among my peers.

[00:02:31] And so, I happen to take an accounting class. I thought it was going to help me balance my checkbook, manage my investments and things, but it was a basic accounting class, debits and credits, and I got it. The numbers just flowed and I'm sailing through this class and I'm looking around at my peers, I'm like, hey, If I become a CPA, it's going to open up all these pathways.

[00:02:51] I can work for government. I can work against government. I can work for big companies. I can work for small companies. I can work in big towns and small towns. This pathway is going to open up for me and the clouds parted in that class and I'm like, this is the way I want to go. And so, it was just, it was, there's no turning back. I just kept on with the accounting field at that point through college and then along the way I got into the taxation classes and the ability to plan and strategize and structure your facts; structure your situation for the best tax result. I just, that just called to me. And so, I went right into tax right out of college and just have never looked back.

[00:03:30] I really don't like auditing. I have a CPA, many CPAs are auditors. I specialized in tax and I haven't looked back.

[00:03:37] Cynthia Meyer: It seems to me of all the years that we've worked together that some of the areas that, that you really enjoy, and tell me if I'm right about this, that you really enjoy, you enjoy digging into complex issues and doing research around them, sometimes finding mistakes that can be rectified.

[00:03:53] And that you also enjoyed tax planning, right? Helping clients get ahead of difficult or complex situations so they can optimize their results.

[00:04:03] Michael Law: Absolutely. I learned that I'm not a very good day to day bookkeeper, but I am fabulous at looking down from 10,000 feet at how the situation is set and being able to manipulate what's there, the facts and reorder the facts to help the clients to the best result.

[00:04:21] You work in real estate. It's really common to only list the building portion on the depreciation schedule and the land sometimes gets missed. I just have a knack for seeing what might be missing: a missing deduction, a missing something on the depreciation schedule, some missing fact that could change the answer to the great benefit of the client.

[00:04:39] I think I was born to the age of Google. I have no problem researching. I love researching and how you structure the question and asking the questions. I can find similar situations; case law, IRS law, revenue rulings, things that can help support the client position. I would just- I just have this knack for research and finding those solutions.

[00:04:57] And so you mix that together with being able to help a client restructure or restate what's going on to their best benefit and I'm very successful at it.

[00:05:07] Cynthia Meyer: You say is, most of the people who are listening or watching here are real estate investors. What would you say are some of the areas that real estate business owners can- What would you say that some of the areas that real estate business owners make mistakes in sometimes in their tax planning or tax prep?

[00:05:26] Michael Law: Missing recording the transactions. So in a small business world It's really common. You need to go buy something for your property and you have two cards, one your business card and one your personal card. And for whatever reason you use the personal card instead of the business. Those deductions get missed so often unless you're tracking them somehow.

[00:05:48] So it's better to have a business account and only use that account for business purposes. It's so easy to miss deductions. The other area of missed things is when you have a mortgage statement, a mortgage payment, often you have property taxes and insurance in that statement, part of your payment. When you get your 1098 at the end of the year, there's only usually interest on that number.

[00:06:12] Sometimes, the statements have property taxes. Rarely does it have the insurance. I find I have to keep asking, what was the insurance premium that got paid in that impound account? Minor, yeah. But it's part of the deductions that get missed.

[00:06:27] Cynthia Meyer: Oh, yeah, I've definitely seen that where, in a review of a client's prior tax return, where they haven't reported their insurance payments, for example, or some other significant fee that they pay as part of their real estate business, maybe in part because of escrow on their mortgage account, or because they paid it with their own personal expenses.

[00:06:46] Happens all the time. Yeah, but people don't necessarily double check.

[00:06:50] Michael Law: Correct. And some things are hard to quantify and people are afraid to try and quantify that. You probably use your cell phone for business. 100 percent deduction probably isn't appropriate because you've got talking to family and other businesses, maybe your employment.

[00:07:04] Some of that phone bill can be allocated to managing your business. Mileage the same way. You have to track the mileage if you're, get a mileage app. And that really adds up. And it really helps for people who are wanting to be the real estate professional; showing the time they invested in their business by running the app, running, having the discipline to to use that consistently, it really helps if you ever get questioned on how much time did you really spend doing your business.

[00:07:32] Cynthia Meyer: Real estate professional status for a second because it does seem to me that many folks. Well, I think this is something that is easier to qualify for than it actually is. Can you give us just the two minute breakdown on what it is and how real estate investors use it in their business and what types of real estate investors would use it?

[00:07:52] Michael Law: That's a great question. Two minutes isn't quite long enough. When you want to be a real estate professional, you have to show that you have a significant amount of your time in that business. There are a couple layers of qualifications. The gold standard, the big one is, usually met that you have a, you're already hired or employed in a real estate field, where you're buying and selling real estate or you're construction in real estate, maintaining real estate, that your primary job, not your ownership of your businesses or your rentals, but your primary job is the one that helps qualify.

[00:08:25] A real estate agent is a good example. A broker is a good example. Then you get these people that own some real estate, and if your primary job is, you have a lot of rental properties and that is your primary income, that's another way. All of your work together combined, adding all those different activities, gets you to that number of hours.

[00:08:43] Cynthia Meyer: Right. 750 hours, I think.

[00:08:45] Michael Law: Correct. Correct. But it's just easier. To be honest, the IRS just doesn't like the real estate professional field. They try and fight that one. And so you have to show you have the hours put into it. It's really hard if you have a career that's unrelated to real estate, trying to get that to median and to, to still, because if you already have a full time career where you're putting 2000 something hours in, how are you going to find another 750 hours to meet that real estate requirement.

[00:09:13] Cynthia Meyer: Right? Which is what like 15 hours a week. It's a lot.

[00:09:16] Michael Law: Yes. It's a lot.

[00:09:18] Cynthia Meyer: I always think and tell me if i'm wrong about this If you have a full time job, if you have a W2 job doing something else, that's not real estate, you're not going to qualify as real estate professional.

[00:09:26] Michael Law: Yeah, I mean if you try and claim it's going to be you're going to be questioned and i've gone through those kind of audits and your log is going to be paramount to supporting your claim and if you don't have a good log, good luck. It's not going to work.

[00:09:41] Cynthia Meyer: Yeah. And so, for those people who do meet the criteria, they work professionally in real estate or they have a larger portfolio of rental or vacation properties that they're personally managing and they're tracking their time contemporaneously, what are some of the situations where it makes sense for somebody to look at picking a box on real estate professional?

[00:10:02] Michael Law: Where it makes sense is where it doesn't make the losses automatically passive. You can use the losses against other income. If all of your rentals are profitable, there's no

[00:10:13] Cynthia Meyer: There's no loss.

[00:10:15] Michael Law: You're not losing anything. It's where you have losses that try and offset other income, particularly wages that run into a problem. Again you have an employment somewhere else. You're trying to offset those wages with the rental state losses. That's where you get into trouble unless you meet the requirements.

[00:10:32] Cynthia Meyer: That's right. Where I think we've seen it in some people where it does make sense is where you have one spouse that has a high earning career or high earning business, right? And then other spouse works professionally in real estate or works nearly full time managing their own real estate business.

[00:10:50] Michael Law: Absolutely. That's really common. And it can be a full time. You have enough rental properties you're managing and managing yourself collecting those rents and running those repairs and getting contracts, evicting the non paying tenants, signing and interviewing new tenants.

[00:11:06] That's a lot of work. And if that's what you're doing, that works. One spouse doing it, doing the work of the real estate, one person earning the wages, that's an easy position to defend.

[00:11:17] Cynthia Meyer: 1031 exchanges. I see a lot in our business that sometimes people come to us at discovery calls, for example, and they're in the middle of a contract to sell a property or sometimes even to buy a property and they haven't thought through the whole process of doing the 1031 exchange. You really have to think about it far in advance before you're going to do it, right? To get everything set up in a row.

[00:11:42] Michael Law: Oh yeah, you need the exchange accommodator lined up. They need to take the funds from that sale. The accommodators can very quickly take over a contract that hasn't closed yet, but once you've taken money at the close of a sale, it's too late to do a 1031.

[00:11:56] The accommodator has to take those funds. They have to hold the funds. One of the downsides, if that 1031 exchange doesn't go through, you don't get the funds back for the full six months. You've got to hold those funds. Now, if that goes over the end of the year, you have an installment sale and you report the sale when you receive the proceeds at the end of that 180 days.

[00:12:18] And so, if you want a certain benefit, you have to jump through the hoops, get the accommodator online beforehand, well before the day of closing, weeks before the day of closing, get them engaged first.

[00:12:29] Cynthia Meyer: And really thinking through like, what are the goals for this transaction, right? So that you have hopefully some ideas lined up before that clock starts ticking such as such a tight time deadline.

[00:12:41] Michael Law: There's several deadlines in there. There's a 45 deadline, 45 day deadline.

[00:12:45] Cynthia Meyer: Right. Identify. Identify or close. Yeah.

[00:12:48] Michael Law: And then you have 180 days to fully close. And anything that's not closed, then you get the cash boot, which is now taxed.

[00:12:56] Cynthia Meyer: So how did you become so proficient in real estate planning? Which it is- I find very interesting. You used to once work for a developer?

[00:13:06] Michael Law: One of my major clients was a real estate developer. And again, as you work on clients, you learn new things, learn new nuances. I've reporting for 1031 exchanges for years, usually 234 a year, and you just learn to streamline that and account for it and know what to look for them.

[00:13:26] Just a lot of experience.

[00:13:28] Cynthia Meyer: So you're in Montana now, but I don't think you're from Montana originally. Tell me how you got there and why?

[00:13:33] Michael Law: It was a long journey. I started my career in California and I was born and raised in California. Brother and sisters in California.

[00:13:41] As the politics changed and also as my family brothers and sisters grew, they eventually left the home and moved out of state. At some point, my parents also retired. My dad had been a state worker in California for a lot of years. In fact, at one point I said, I noticed that his house was rather empty and it was bigger than mine.

[00:13:59] I said, dad, how about you let me buy your house and live there because it had a pool, California, warm weather. It was going to be perfect. I had kids at the time. I was like, oh no, I'm not going to go anywhere. This is the house we're going to retire in; live in forever. But fine. So I had to relocate and buy a bigger house for my family.

[00:14:16] The next year he moved out and then I was the last one in California and doing a number of circumstances, a business I was trained to operate in, I lost my father-in-law who was living next to me at the time. And then some other, oh, I lost my grandma. All in one year, there was a lot of, life events that happened.

[00:14:37] I'm out in California by myself, with my wife and family and her side of the family. And I looked and saw the rest of my family in Utah at the time. And I thought, man, my kids are missing out on seeing their cousins. They're missing out on the involvement of my family. And we decided as a family that let's relocate.

[00:14:56] We didn't need to be in California anymore and for finances. That's where I worked at the software development company. Suddenly every month and sometimes every week, we were getting together with family again on my side of the family. But the software company I was working with was a startup. We were going to develop tax software, the next generation of tax software for clients. Very expensive, but a startup is reliant on venture capital funding. And as we, took on this very large project, they did not anticipate how much it was going to cost to develop. And so, we were having problems with funding getting more enough funding.

[00:15:30] I just had this feeling and I talked to my wife, but I said, you know what? I don't think we're going to take this program to completion. I said I actually think we need to find other work.

[00:15:39] This opportunity to work for XY Planning Network came about and I reached out to them and I could tell that they were going to try and start a tax service and I brought that to my wife and I said, this, I think this is it. We need to move and we need to accept this job. And so, in October, at the end of what's normally a tax season, I flew into Montana.

[00:15:57] Easiest job interview I've ever had. In my mind, I'm thinking I need to find work because the software development job is going to go away. And easiest job ever. I've been a CPA for 20 something years at this point. I explained what a CPA office needed. We talked about the software. We talked about how much work in each CPA do. They recognized I had the knowledge to do the job they needed. They gave me the offer very quickly. I went back to Utah and submitted my resignation and then they said, great, work till Friday, you can go. So Friday, I have three or four days after I turned in my resignation. They said, take vacation.

[00:16:37] You're done. You're great. You don't have to work anymore. I'm like, oh, great. Fabulous. XY called me up, had me fly back up to Montana and started my work the next week. The very day.

[00:16:45] Cynthia Meyer: Oh, that's amazing. And the whole, everybody moved with you?

[00:16:48] Michael Law: Everything moved very fast. My first day on the job at XY, I get word from all my friends back in Utah that they laid off all of my peers in that department. The same day I started at XY.

[00:17:01] Cynthia Meyer: That's heartbreaking.

[00:17:01] Michael Law: Dodged a bullet. I missed out on the severance package, but I dodged a bullet. I had full-time employment for me and my family.

[00:17:09] Cynthia Meyer: That's amazing. That's amazing. And then, so then you landed in Montana. Had you been in Montana before or was it first time?

[00:17:15] Michael Law: I had not. That was the first time I've ever been in Montana. But I enjoyed it. I love nature. I love animals. I love seeing geographic formations. Drive into from Big Sky area, West Yellowstone down into Bozeman, beautiful drive. Glacier National Park, absolutely beautiful. I just love the openness of Montana. I love how everyone just live and let live.

[00:17:37] It's not as nosy and not as, clique-ish is some of the other places I've lived. I just found a home here. I fit in here and what I really like is people aren't as pretentious. I can wear blue jeans all the time and boots all the time. No one cares. 'cause that's Montana is I. I just fit in well here like I've never fit in before.

[00:17:58] Cynthia Meyer: You found your real...

[00:17:59] Michael Law: I found my people, yeah.

[00:18:00] Cynthia Meyer: You found your people. You found your people. For those of you listening it, you know that the Financial Planner Network that I belong to, XY Planner Network, did not continue with tax practice and you ended up, you bought a firm. So from somebody that was retiring, right?

[00:18:14] Michael Law: I did. Well, actually she says she's retiring. I bought the practice. She still works for me. CPAs don't ever really retire. They just lose their balance at some point. Sorry, funny joke there. But She had this when I came up here, it was just before COVID hit. So 1999 was when I got the job offer and moved up here. COVID hit the next year. It was absolute madness. All the tax legislation ,everything, all the pressure that the lady I bought the practice from, she's the CS of CS and company.

[00:18:45] I've kept the name. It just, it was just too much for her and she couldn't handle running a business and trying to help clients through all of that. We had a meeting and it was almost like high school kids chittering and laughing. We were such a perfect fit; how we treated clients, how we wanted to go about our work.

[00:19:00] Very happy that we found each other and met. We're great friends. We think differently. We approach things differently, but she loves that I can research. She loves that I can solve problems. She loves that I have- I knew how to improve her technology to improve and be more efficient. And she just loved that second voice helping her and turning the firm around or helping the firm become better, more efficient.

[00:19:25] And she just has loved to seen how it has grown, too. And so she's a very valuable part of my team loves being here and I think maybe that's why she's extending her work period before she retires. I may have a couple more years with her as we develop new staff to take.

[00:19:39] Cynthia Meyer: Oh, that's quite a blessing.

[00:19:41] Michael Law: Oh yeah, no, absolutely. I couldn't have done this job had she left immediately. It's been a, it's been really fun working together. We tease each other about our outlook on life and how we work and but we are really good friends. We get along and it's just been fabulous. I'd much more enjoy- I couldn't believe how the difference in being a business owner, particularly as it's running successfully and the employees are happy, the clients are happy, success is coming my way. There's way more work than I can ever accept. We have to turn down some clients that call us up. But. It's fun to be able to serve them, and it's fun to be a high achieving a team together and know that I helped lead that to where it is.

[00:20:24] Cynthia Meyer: So, have you had a mentor in your career?

[00:20:27] Michael Law: Yes, my first employers were a mentor that helped me through the calculations; ongoing training. I belong to a very large CPA discussion group where we can share ideas and concerns, issues that are going on, but I've watched and learned and taken training to make sure it's right.

[00:20:44] Cynthia Meyer: It seems to me that, knowing a little bit about the arc of your career, you worked in software, right? You worked for our financial, my financial planner network, the XY Planning Network as a Director of Tax there, and then you went out on your own. How has that influenced the work that you do now?

[00:21:03] Michael Law: That is a great question. Every job I've had has almost prepared me for the next one. And so working for CPA firms, I learned how they operated from the inside. When I worked for the software development company, it was a tax software development company. I was helping them see what a CPA needs, what the data information transfers, the missing information, helping client and tax preparer communicate and document how a CPA works and thinks and develops work papers; how it's helping the engineers design tools around that.

[00:21:37] So all that work beforehand helped me in that field, helping them design the software to make the CPA's job easier. At the same time, some of my roles there were actually writing tax software, both for federal and state purposes. And so, I got to look into a number of different states I hadn't worked in before trying and looking at the underlying calculations of the states.

[00:22:03] And so, I got exposure to a many more states than I typically that I had before that, which was mostly West Coast. Now I was calculating the tax and seeing how the state approached the tax and how they tax the income. I get this job at XY Planning Network, which was starting a tax practice, and we had clients in almost every single -state.

[00:22:24] And my work in- at the tax software company involving those different states and learning how the e-file system worked and data was submitted, helped me address and answer how to help those clients serving in those different states or filing in those different states.

[00:22:41] Cynthia Meyer: It seems to me over my as a financial planner that most people dislike taxes, or they have are suspicious about the tax preparation and filing process. But it seems like you love taxes. So what would you say to those people who are tax avoidant like they put it off until the last minute, or they're tax suspicious, right? Like they, they don't, it all looks too complicated to them.

[00:23:07] Michael Law: It is complicated. I'll give them that and certain amount of- but I can help them get organized.

[00:23:13] I can help them put the pieces together. I, it's like a puzzle to me. I enjoy puzzles. I enjoy solving the situation. I get a bunch of seemingly unrelated facts and I develop that into a story that goes into a tax return explaining the year to the reporting to the governments. A lot of people fear governments, in general.

[00:23:32] Tax is just reporting what happened or how it happened. It's not as painful, but if you avoid taxes, if you avoid the problem, it's almost like ignoring a sliver in your finger and it festers and pusses up and it causes more pain and problem and when you finally get that sliver out, then this burden is released from you.

[00:23:50] There have been times and in fact right now I'm particularly working with a client that's got five years they haven't filed and trying to get records from five years ago is hard. We have multiple years to put together. We have a big problem and organization wise to catch up with those things.

[00:24:07] But once that's done, it's a great relief. You're caught up, don't have one of those 38,000 agents chasing you down anymore. That was a fear for a long time. IRS is hiring more people. There will be more audits. They're looking at more people. Be clean. Be able to sleep at night once it's all caught up.

[00:24:25] Cynthia Meyer: Yeah, it certainly seems like sometimes people have an unreasonable fear of the IRS and in getting their taxes done, right? That they almost look at it as punitive and many people also, I think, don't realize that they look at their marginal tax rate, but they don't look at their effective tax rate.

[00:24:43] Michael Law: That's true. Or even how tax rates work. A lot of people think once you get into the next bracket, all of your income is taxed to that bracket and that's not true. Think of it like...

[00:24:53] Cynthia Meyer: It's retroactive or something. Yeah.

[00:24:54] Michael Law: Yeah. Think of how oil sits on top of water. That's like a tax bracket sitting on top of the prior tax bracket and it stratifies. So the income fills the bottom bracket, then the next bracket, and then the next bracket. It's not all taxked to the top rate.

[00:25:08] Cynthia Meyer: So I'm curious, can you, if somebody comes to you either directly or via another financial planner and they're in the middle of an IRS audit, but you didn't prepare the tax return, can you help them with something like that?

[00:25:22] Michael Law: Absolutely. I do have to get a power of attorney to represent them, but I can look at the first return that was filed under audit, and I can provide research and answer. The IRS agents, a lot of people fear them, but those agents are learning. Too often, they aren't as experienced or even if they are experienced, they just need to explain the story.

[00:25:44] So you have the facts lined up and filed on the return. They're just questioning how that facts put together. Do they meet the requirements to, to get that result? And so, I help the client with their records and with written analysis to help support what was done on that return.

[00:26:01] Cynthia Meyer: So if you were to give people general guidance about how to best work with their CPA or tax preparer, specifically thinking about people that have rental properties, what guidance would you give them in terms of how they should be doing things over the course of the year?

[00:26:19] Michael Law: One, keep good records. For that's the most important thing. If there's records there, then you've got, generally you have your answer. If you're thinking about doing something like a 1031 exchange, get your CPA or tax preparer involved in the process. Let them know you're doing that. Sometimes it doesn't make sense to have a 1031 exchange.

[00:26:40] If you have a lot of suspended losses and your gain isn't very big, use up the suspended losses. It doesn't- jumping through the hoops of a 1031 exchange to save a little bit of money when you have those suspended losses, you could use instead is actually more work. So you have to look at your whole situation and a good CPA is going to point that out to you.

[00:27:00] Don't do it this way. I've had, or if you have big capital losses, go ahead and report a gain and use up some of those losses that are otherwise not going to be reached. Often, according to the situation of the taxpayer, a 1031 really doesn't make sense. Something else to talk about with your CPA is, how did you get the property?

[00:27:21] One of my biggest wins in helping someone was, this property had been in the family for three generations and the guy knew, oh, I knew we bought this for like a dollar an acre. And then he was just thinking about selling it for a much higher price. Well, how did you get it? I got it from my mom.

[00:27:36] How did you get it? My mom got it from my grandpa. Did it go through an estate? Oh yeah, both times. What was it valued in each estate?

[00:27:43] Cynthia Meyer: So it stepped up, yeah.

[00:27:44] Michael Law: It's, he got two step up in basis. He was thinking of the grandpa's basis, but his mom's basis was much higher and suddenly, for tax purposes, he had a loss where in his mind he had a gain because of what the grandpa bought the property for. Knowing when property basis changes going through an estate is critical to disposing of a property.

[00:28:07] Cynthia Meyer: We've had some conversations in the past month or so about the beneficial ownership report, right? And does it apply to rental property owners? Any thoughts about that?

[00:28:19] Michael Law: Also a great question. The Beneficial Owner Reports is for any entity that's registered with the state. And so, a lot of property owners put each property or several properties inside an LLC. That's a state entity. So they need to file beneficial ownership for those businesses, even if they're single member LLCs, normally disregarded for tax law, under BOI, they need to file. Now, as of the time of this recording, the US district court in East Texas, there was a case and it was, they put a stay on the filings. They said, this is not good for the people. It's an overreach of Congress; can't do it. So right now there's a stay. There's also an appeal that was filed. So we're a little bit in flux.

[00:29:04] Do we have to file or do we not? If that stay that the U. S. District Court put in is overturned, the filing's back again. So be careful.

[00:29:14] Cynthia Meyer: And not that complicated to do it, right? Like, for most people, not that hard. When you have a bunch of different partners, then it can be a little bit more complex.

[00:29:24] Michael Law: It's also a privacy thing. Well, there's several things about it. It's the law affects interstate commerce, which Congress can do, but it reaches people that don't have interstate commerce. If you're renting a property, you don't have interstate commerce. It's income in that state. You're not dealing with renting across states, and you're not moving goods across state lines.

[00:29:47] You're also, the argument is, it's a state law, the federal government is impinging on the state law. The states get to choose what their entities have to report and there are several states that don't have to disclose ownership of their corporations. And so, the states see this as an infringement of the state, effectively a state right.

[00:30:06] And so, it's a federal versus state thing. It was, it's a bit of an overreach.

[00:30:10] What I find is that if the federal government had listed this only for corporations, I'd swallow it a little easier because your partnerships are already filing K ones and revealing the partnership ownership interest in capital accounts that to include the LLCs with the corporation was in my mind, a overreach. Now, my last name is Law. I'm not an accountant. This is not legal advice. This is compliance comply with the law and what I see in complying with the law.

[00:30:40] Cynthia Meyer: That's right. That's right. No, we can even the tax conversation here. I think we can consider this tax education, not tax advice.

[00:30:46] Have get tax advice from Michael. You need to hire him directly. So, so I'm curious. You've been a business owner for several years now. What are some of the things that you have learned about yourself? Okay. Starting your own business.

[00:31:00] Michael Law: What I like about business, being a business owner is I can set the tone. I've worked in good CPA firms and I've worked with bad CPA firms. I've had to work with clients that didn't quite fit with my personality. It just wasn't a good match, but I had to, I was assigned to work on them. I had to do them. Now as a business owner, I can pick and choose who I want to work with and identify quickly.

[00:31:22] If you're not someone whose personality fits with mine, let's not fight over working together, find someone that fits you better, communicates with you better, understands you better. I'm not a perfect fit for everybody. I don't, I'm not going to try to be. But there's many clients I can fit with, communicate with, and work with, and that makes it enjoyable.

[00:31:43] I really enjoy being a business owner. I look at income differently. I look at how my firm operates differently than I ever did as an employee because I get to see the bottom line now. And I realize that's income I get to pay tax on, have to pay tax on. But I also see opportunity to benefit my employees and make their lives better.

[00:32:03] I didn't really know how good, I know I had a great tax season. I just know it worked out well, but it was very validating as we met with employees at the end of the year. Talked with them, these new employees who worked with us and the comments we got back were incredibly one of them said, I wish I'd quit my last job years ago, or this is the best employment I've ever had, where we're invested in them, we want them to learn and grow and be smarter, because that really leads to me making more money, and them making more money.

[00:32:32] I'm invested in teaching them because if I can teach them something, and now they can reuse that learning, they're a better employee, they're more talented, they can do be more efficient. And by investing in them, they feel valuable. One of the biggest secrets, let me keep going, one of the biggest secrets, funnily enough, is food.

[00:32:52] I bring in food regularly to my office and my staff love it. It doesn't cost me very much, but it really improves morale. And so something simple as a weekly lunch, where we can sit and chat, nothing necessarily business related. But just the fact that I'm providing food for them or I see something they like and I stock that in my little pantry in the kitchen, it makes a difference.

[00:33:15] They feel valued and now I have a loyal employee and it really didn't cost me that much.

[00:33:21] Cynthia Meyer: I bet you learned that as a dad of many children.

[00:33:24] Michael Law: Yes, also a scout leader for many years. I learned scouts could move mountains if they had beef jerky and Gatorade.

[00:33:31] Cynthia Meyer: So what's next for your business, CS and company? If everything works out exactly the way that you want it to, what does that look like over the next decade?

[00:33:38] Michael Law: Decade? Well, that's not quite, I'm not quite ready to retire in a decade. But the two stuff...

[00:33:43] Cynthia Meyer: I'm not trying to get you retired. I'm just trying to get you think 10 years ahead.

[00:33:46] Michael Law: 10 years out, I can see at least one or two of my staff once getting licensed in CPAs and being part owners in it. I want them here. When you're a part owner in the company, suddenly you're now more engaged in the overall firm rather than just being individual. Thinking about yourself, you're thinking about the firm, wanting to be part of the firm, wanting to be part of the- a seat at the table. They're more committed to staying.

[00:34:09] Unfortunately, there's a turnover in our field, just like there's every- many other fields. And if you're looking at it from the employee's perspective, fine, you look over the fence and say a little greener over there, I'm going to go over there. Maybe for a slight raise, maybe it is better over there.

[00:34:22] But If I can hire them and turn them into part owners, they're more committed to staying with me and then I don't have to go through the cost of hiring a new employee. So 10 years out, having two or three part owners in my firm would be fantastic for me where I can now have a team deciding how to grow and treat my employees and work with the clients we want to work with and making decisions about how to reward the employees and ourselves in getting our work done.

[00:34:51] Cynthia Meyer: So what would you say the best piece of advice that you've ever received is?

[00:34:55] Michael Law: That's a good question. But I learned it from my grandma. It wasn't ever really taught to me. My grandma treated all of the grandkids as if they were the most special grandkid ever. And I've just turned that to how I relate to my employees and find something that they enjoy or like different than everybody else because then when I rewarded something to them, that appeals to them, they feel special. I did that in scouting. I learned it by example from my grandma and it was just funny as my sisters and brothers and I were talking, all of us thought we were the number one grandchild. We just all assumed that's how she treated us.

[00:35:34] Cynthia Meyer: Yeah.

[00:35:34] Michael Law: And so as I look to see what my employees liked, it could be the type of drink they like. It could be a certain snack they like. I have a staff that loves hot sauce. And in giving thing- small token gifts out, I chose for him this packet of hot sauce. And it was like, Oh, he knows me. He cares enough about me to know this about me and it really impresses them.

[00:36:01] Cynthia Meyer: So is there anything that you're really curious about right now?

[00:36:04] Michael Law: I'm curious how many of the promises President Trump made will actually get enacted.

[00:36:09] Will corporate tax rates drop to 15%? That'd be interesting. Several of my clients are taxed as corporations, 5 percent tax cut that or a quarter of their tax from 20 to 15, that'd be pretty substantial. Is he going to be able to make social security non taxable? I have clients that are collecting social security. Is he going to be able to make all the changes that he said he was going to make? Up until the elections, we anticipated a big change at the end of 2025, where the Tax Cuts and Job Act expired. And so, we've been holding pretty steady for a number of years now, but knowing that 25 was going to be the year of change, planning for that change, including a state law. He's indicated that he's going to extend the Tax Cuts and Job Act. And so that reduction in the state threshold for filing and taxation is, may not go down as anticipated. And so a lot of CPAs were helping wealthy clients get wealth out of their estate if they were very wealthy with the anticipation that the state law was going to drastically change the end of next year.

[00:37:09] Cynthia Meyer: We don't know what, it's as much as the president has opinions about it. It's up to Congress to decide what they what they pass in negotiations around things like, for example, me and New Jersey, with the state and local max limit, the salt limits, right.

[00:37:22] What's going to happen with that? Like all of these things are up for grabs now and things we've been preparing for a while as financial planners and CPAs and it looks like they're all gonna get mixed up in the blender, again.

[00:37:34] Michael Law: Who knows? A lot of states went pass laws that would allow businesses to pay the tax at the business level. That helped you get around that state and local taxation limit, of the state and local tax limit goes up a lot. Maybe they don't need that rules more and that work around as much. Who knows? What's going to be interesting is generally when tax law passes that's beneficial, they backdate it to the beginning of the year.

[00:37:59] So when he takes office the beginning of next year, he may be able to pass law effective January 1st 2025 that's beneficial, that we thought was going to be consistent with the law we're facing right now. So there might be some changes because of beneficial law changes to think about as this legislation, assuming this legislation passes, these promises pass, they might be retroactive to January 1st.

[00:38:25] Cynthia Meyer: And so where can people find you online?

[00:38:28] Michael Law: CS and Company or csandcompany.com is my corporate address. You can find me on LinkedIn. I'm not very- I don't post a lot on LinkedIn, but you can find me there. But you can call and talk to me, as well.

[00:38:43] Cynthia Meyer: That's wonderful. Michael, thank you so much for this conversation today.

[00:38:47] It was chockfull of bits of wisdom and lots of really inter interesting details about your professional and personal story. Thank you very much.

[00:38:57] Michael Law: Thank you for inviting me. I enjoyed being here.

This blog is for general financial education purposes. Information contained in this blog should not be construed as financial, tax, real estate, legal, or investment advice. For educational purposes, blog posts may contain links to other websites which are not under the control or and are not maintained by Real Life Planning. Real Life Planning has provided those links for your convenience but does not necessarily endorse all the material on those sites. Please consult your financial, real estate, legal, or tax advisor for advice specific to your situation.