Transcript of The Tax Strategy Billionaires Use That Almost Nobody Talks About | Ep. 442 with George Dimov, CPA and President of Dimov Tax

That's really how the, the ultra-high net worth really don't pay taxes, because the value of their net worth is tied to the stock. Someone's going to borrow against it, effectively never actually paying tax.

George Demoff 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 the single most What's the most expensive mistake that smart people make around taxes?

People that tend to overthink or be very nervous tend to overpay. 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?

That'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 this 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 that's generating income, those are working rich, okay? Those are people that are earning a lot of money and many of them do get taxed quite a bit, okay? 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, pardon me, their net worth is 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 or co-founder of a large technology company. That stock may have gone from a par value of, you know, under 1 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 in 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 more 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 misspend 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 person strategy that anybody can take advantage of to some extent or another. Many 401 programs may allow you to borrow from them. So let's say that you've been contributing to your 401 for a 20 or 30-year career. and you have, call it a few million dollars in there, okay, depending on how it was invested and how that performed, there are some 401 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 a 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 a, 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'll 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 the single most expensive mistake that smart people make around taxes?

So there's a, it 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 of tax strategy with it. For instance, cost segregation studies are a way that people can frontload 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 using 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 W-2 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 that many people just simply don't take advantage of these things.

And one of them is your 401 match. This is something that—

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Um, 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, you know, tens of thousands of dollars worth of a tax reduction. And so 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 thing that we see smart people miss out on. Now, if they're business owners, there's a whole array of different things they can do. And that's a whole, we could do a whole podcast episode just on that. But if for anyone who'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 2 or 3 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 SEP IRA or solo 401. 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, you know, any online brokerage platform often allows this, which is called a SEP IRA. SEP, S as in Sam. E as in Edward, P as 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 can set up yourself. A solo 401 takes a little bit longer and many of the brokerages charge some underlying fees to administer it. But that's also something that you can set up by yourself or you can ask your broker to do it for you if you have a stockbroker.

So these are 2 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 bookkeeping. 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 didn'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 were still on their payroll. Okay, so I'd say another 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. You know, I've attended lectures by Verne Harnish, who does these scaling up, you know, kind of 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, you know, maybe 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 medium-sized businesses as well.

Vern's awesome, by the way. I always love Vern. I think in the future we're gonna see a big rise in freelancers, people that they don't wanna work a 40-hour-a-week job. They wanna be able to freelance and bounce from place 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 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 this 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, don'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 offsite place that's not your regular commute to your regular office, if you even have one?

How much is, uh, how much do you spend in courses or things to continue to stay on top of your profession?

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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 as a percentage of your P&L. So that's how people actually get audited is when they do really silly things. Like the common example that was all over social media a few years ago was this G-Wagon deduction that somebody invented, okay? That said that, and what ended up happening is people earning only a couple hundred thousand dollars a year would buy a very expensive luxury vehicle and write off the whole thing on their returns. And so the IRS would see that huge you know, $100,000 write-off, and immediately that return would 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, common sense, and common sense isn't so common. So first 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 got to be careful when you, when you go on social media, right? You got to 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 return and see which one plays out best. These questions are best answered when you have, when you, you know, book some time with your accounting professional and actually run the analysis. Now we have ChatGPT, you can ask them. Of course, half the time it's wrong, but it's something that you can run through ChatGPT, but then you can also, you know, book maybe an hour or 2 of an accountant's time to run some scenarios with your data in there. And clients have us do this all the time.

I've 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, most businesses, I'd say you have to start off and make sure that you have the right structure. I can tell you some things that I've seen done before, and these are— 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 of how much it grows. And then 5 years later, when they sell their share and it's worth $25 million, all of a sudden they have a Roth 1099 distribution that says $25 million, taxable portion zero. So I've seen things like that. So that could be questioned by the IRS, but I've seen other things such as using an 83 election, okay?

Meaning that they are receiving all of the shares at the par 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, you know, in the 40s. So we see things like that.

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 demand. The biggest complaint that we hear in accounting, and the biggest reason people are 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, that's the best fit for somebody if they are using mental health services? So this kind of just all feeds into 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 service. I mean, think about from 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 gonna 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 industries, 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 pursued passion careers, things that they like and things they're 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 have a CPA license that on good terms resign because they want to start a 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 that 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 accountants.

But 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 that are baby boomer age to get them to be able to set up trusts around the, it's estimated $80 to $100 trillion wealth transfer that's happening between now and the next 10 years as baby boomers pass away. So what I want to know is what happens to that wealth from a tax perspective?

I think that I'm kind of, you know, this is 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 posts on social media that break down 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 earn, 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 and each state has different ones, which are estate thresholds on how much you get taxed, if any, depending on how much assets, how much value in 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 an estate 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 specifically and personal tax specifically. And that's just because people need personal tax and it's extremely challenging, extremely difficult, and larger companies don't want to touch personal taxes. You can't charge much for them. A client will get shocked at a $700 invoice while an attorney charges, you know, a $5,000, $10,000, $15,000 retainer just to get started on the case. And with us, we, 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 $5,000, $10,000, $20,000. Think about hiring an attorney, that's $5,000, $10,000, $20,000, any of these professional services. But then you hire an accountant, it's like $1,000. 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 backwards 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 tax. 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 this is why, and oftentimes it's simply a matter that they earned more and they withheld less because of some change in their payroll department at work. 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— and 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 on 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 businesses oftentimes, especially if they're larger ones, it's less of an emotional conversation. So, but we've, 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 think 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 want to do it until that happens, and then you realize you should have gone to paying the service is going to be better for 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, right? 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 AI. 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 chain all the way back to the CEO, and the CEO tells the investors, and they say, well, I'm not gonna invest in 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 there's 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 $1.22 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 Claude or whatever software my internal accountant 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 TurboTax, TurboTax is a very good tool for people that have a simpler tax situation. When it gets more complicated, that's, they just need professional help.

When you think about the ability to scale, was there a certain marketing strategy that you used 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 talk to my friend, you know, a few times a week about business and 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 on their, 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-in porch or deck. And it's the same thing with us. If we do an amazing job on somebody's business setup, we'll 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 join a network such as, and I'm not talking about 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, Vistage, or for people that are higher income, YPO, Young Presidents Organization. So these are all ones that some of them have an income requirement, I believe, For EO, it's $1 million, and I believe for YPO, 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 someone these questions. If I ask AI, it will probably give me the wrong information. And you, you need the experts to talk to. So George Demob, always great chatting with you. And thanks for coming on the show.

Amazing. Thank you so much.