The IRS Loopholes That Could Save You Thousands This Year with Karlton Dennis

Summary

Podcast Summary

Podcast: Money Rehab with Nicole Lapin
Episode: The IRS Loopholes That Could Save You Thousands This Year with Karlton Dennis
Date: April 6, 2026
Host: Nicole Lapin
Guest: Karlton Dennis (Tax Strategist)

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Overview

This episode dives deep into legal tax strategies, “loopholes,” and often-overlooked deductions that can save taxpayers – entrepreneurs and individuals alike – thousands of dollars. Nicole Lapin and tax strategist Karlton Dennis explore actionable ways to reduce your tax bill before the filing deadline. The tone is fast-paced, accessible, and no-nonsense, with both providing practical examples and cautioning against red flags and scams. The episode also debunks myths about the wealthy paying “no taxes,” and reveals the reality (and requirements) behind major deductions and legal tax avoidance.

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Key Discussion Points & Insights

1. Mindset: Tax Hacks, Not Tax Time Dread

• Most people avoid talking about money, let alone taxes, but with the right strategies, you can go from overpaying to thriving.
• Nicole Lapin: “Nobody wants to think about taxes, but everybody wants a tax hack.” (03:37)

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2. Tax Breaks for Families: The Child Tax Credit

• Karlton Dennis (KD): “If you have a child, the IRS will provide you $2,200 per child and 1,700 of that is refundable. So a lot of taxpayers end up getting money back just by claiming their children.” (03:51 & 05:27)

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3. Bonus Depreciation and Vehicles: Section 179 Explained

• KD: Business owners can benefit from "bonus depreciation" – writing off the entire purchase price of qualifying assets (like vehicles above 6,000 lbs or equipment) in a single year.
• Example: Buy a $100k SUV, put $7,500 down, write off the full $100k, and save up to $37k if you’re in the top tax bracket. (04:01, 07:10)
• Important Asterisk: The vehicle must be used at least 50% for business. “...if it's not used 100% for business, then you have to determine how am I going to be able to write this off?” (08:46-09:53)
• Track your usage carefully for compliance.

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4. The Foundational Tax Code: Section 162A

• KD: “A business owner can take a business deduction if the deduction is ordinary, necessary, and reasonable to the business owner in the pursuit of income.” (10:10)
• No IRS list for “acceptable” deductions; it’s about documentation and reasonableness.
• Creative approaches: KD embroiders his clothing and makes it part of his “uniform” to write it off.

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5. Side Hustles, Hobbies, and Audit Red Flags

• If reporting losses for multiple years with little business income, the IRS may reclassify your business as a hobby and disallow all your deductions (retroactively!).
• Avoid “other expenses” and “miscellaneous expenses” on your Schedule C: IRS looks for abuse here.
• KD: “These can sometimes be red flags and can subject you to an IRS audit.” (14:13)

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6. Audit Realities

• Most audits aren’t scary if you’re organized: “It’s like a teacher grading a test in front of you.” (15:38)
• Key is substantiation: “...if you do not have correct documentation, these audits don’t go in your favor.”
• Surprisingly, 60% of audits Karlton’s firm has handled resulted in taxpayers getting money back. (16:47)

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7. Wealthy Tax Tactics: Real Estate and Loans

• “The goal is not always to pay zero taxes,” KD clarifies. Often, the wealthy reinvest heavily to reduce taxable income, especially into real estate for depreciation.
• “Elon and Trump don’t make earned income. ... They can take loans against their stock, which is non-taxable borrowing against your own value...” (20:52)

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8. Short-Term Rental Loopholes

• Running a true Airbnb/VRBO business with “material participation” allows bonus depreciation to potentially offset W2 or 1099 income.
• Use a cost segregation study to accelerate “depreciation” (write-offs) on everything that doesn’t last 27.5 years (e.g., appliances).
• Limits exist (Excess Business Loss Limitation): Only so much can offset W2 income per year, but “leftover” deductions roll forward.
• Pro-tip: Run an Airbnb only for the end of the year (Oct–Dec) to meet 100-hour rule, then switch to long-term rental. (27:01)
• Nicole: “But now you have Bob ... and he's calling you and the toilet's broken … does it fit your lifestyle?” (26:49)

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9. The Augusta Rule: Rent Your Home to Your Business

• Based on Masters Tournament history, allows you as a business owner to rent your personal residence (up to 14 days/year) to your own business, claim a deduction, and receive that income tax-free.
• Requirements: Must be your primary residence and paid by an S corp, C corp, or partnership (not a disregarded LLC). (29:04, 31:08)

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10. S Corps and Entity Structuring

• S corps can “cut your self employment tax,” give you payroll options, and enable extra deductions like the Augusta Rule.
• Consider switching to S corp at $50k–$60k profit, but only if tax savings outweigh increased admin costs.
• S corps unlock games with payroll & Qualified Business Income (QBI) deduction (20% if under certain thresholds). (33:51)

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11. Privacy and Liability: State of Incorporation

• Never associate your LLC with your home address for privacy. Use a virtual address unless you want Google Earth shots of your house public!
• For more privacy, create a “parent” company in Wyoming/Delaware/Nevada and have it own your operating business in your state. (36:47)

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12. QSBS: Huge Tax Breaks for Start-Up Founders

• Qualified Small Business Stock (QSBS) exclusion—if you set up a C Corp and hold the shares 5+ years, could sell your company and exclude up to $40M–$75M from capital gains (subject to rules). (38:18)
• Plan early: Must be a C corp before big valuation jump.

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13. Children on Payroll & Custodial Roth IRAs

• Put your kids (even toddlers!) on payroll for legitimate business activities—up to $16,100/year federally tax-free.
• KD recommends: “You have to keep in mind reasonable compensation” and document work with contracts, calendars, and actual deliverables. (41:34)
• Fund a custodial Roth IRA for your child (can grow to $1M+ over time tax-free).
• For high-income families, use Backdoor Roth and Mega Backdoor Roth (SEP IRAs with Roth conversions) to get tax-free growth. (44:31)

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14. Self-Directed Roths

• Can hold non-traditional assets like real estate and private investments in your Roth IRA, but cannot invest in your own business.
• “Peter Thiel” example discussed.

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15. Wild (But Legal) Tax Hacks

• Film/TV Investments: IRS Section 181 lets you deduct 100% of production costs for U.S. films under $20M — even as a leveraged outside investor. (47:00)

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16. Scams to Avoid

• “Charitable LLC” structures promising 4–5x leveraged write-offs for land or donations are red flags. Avoid tax shelters pushed by sketchy promoters; not worth IRS trouble. (49:03)
• Caution: Using AI for tax advice is useful, but AI won’t stand by you in an audit.

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17. Balance Strategy and Lifestyle

• Don’t let tax maneuvers overrun your life. “Lifestyle and peace of mind matter far more than attempting to take actions that ... take you away from moments and memories.” But the “cost of not knowing” is giving money away needlessly. (52:48)

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18. Final Tax Tip: Private Family Foundations

• Philanthropy is a wealth strategy: private family foundations can avoid capital gains taxes, allow grants to family (income shifting), and only require you donate 5% per year. (53:45)
• “There is no capital gains tax inside of private family foundations... you can contribute your own cash ... and take up to 30% of your AGI as a year one tax deduction.” — Karlton Dennis, (53:45)*

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Notable Quotes & Memorable Moments

• KD: “I paid 0% in income taxes last year.” (03:27, 18:36)
• KD: “The tax code is now a system that doesn’t work against me. It works for me. It’s a tool to help me grow and build my wealth.” (17:00)
• Nicole: “What about people that want even more privacy and they set it up in Delaware or in Wyoming?” (37:02)
• KD: “You have to go spend money to pay less in taxes. 100%. That is correct.” (20:38)
• KD: “If you, if you are educated on how the tax code works ... you’re going to be excited to go do those tasks and rules.” (17:00)
• Nicole: “Children are so expensive. I think it’s time they earn their keep. So I pay my daughter...” (41:20)
• KD: “Philanthropy is ... a wealth building tool.” (53:45)
• KD: “The cost of not knowing is very great. Those who choose to never approach the tax code, don’t realize what they’re sacrificing.” (52:48)

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Useful Timestamps

• 03:27 – Introduction to tax hacks; Karlton’s 0% tax bill
• 05:27 – Maximizing deductions before tax deadline; Bonus depreciation
• 07:10 – Section 179 vehicle deductions explained
• 10:10 – Section 162A: The “ordinary, necessary, reasonable” standard
• 12:17 – When to form an LLC vs. hobby risk
• 14:13 – Red flags: “other”/“misc” categories on Schedule C
• 15:38 – Audits: Reality, process, and positive outcomes
• 20:38 – Strategic investments to reduce taxes; The real estate tax advantage
• 24:08 – Cost segregation studies for short-term rentals
• 29:04 – The Augusta Rule: Renting your home to your business tax-free
• 33:51 – S Corps as a “wealth machine” and payroll flexibility
• 36:47 – Entity privacy and using Wyoming/Delaware entities
• 38:18 – QSBS: How start-up founders can avoid huge capital gains
• 41:20 – Children on payroll explained
• 44:31 – Roth IRAs, backdoor/mega backdoor contributions
• 47:00 – Film investments for tax write-offs
• 49:03 – Scams: Charitable LLC schemes and AI-driven tax pitfalls
• 52:48 – Philosophy: Don't let tax strategies override your lifestyle
• 53:45 – Final tip: Power of private family foundations

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Conclusion

This episode serves as a checklist and mini-masterclass for legal, creative tax-saving moves available to everyone, not just the super-rich. Karlton Dennis demystifies the “big loopholes” and warns against shortcuts and scams, emphasizing careful documentation and compliance. Whether you’re W2, a side hustler, or a growing entrepreneur, these strategies—when understood and executed properly—can rehabilitate your wallet and turn the tax code into a tool for wealth and peace of mind.

Transcript

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[Nicole Lapin]

How much are you paying in taxes?

[Carlton Dennis]

I paid 0% in income taxes last year. You as a taxpayer have to be willing to apply code section162A. That's how you can write things off every single day when you walk out of your house.

[Nicole Lapin]

Nobody wants to think about taxes, but everybody wants a tax hacked. So today I'm sitting down with tax strategist Carlton Dennis to make sure we don't spend one more penny than we have to on taxes. He tells me what tax perks you can still take advantage of before the filing deadline.

[Carlton Dennis]

If you have a child, IRS will provide you $2200 per child and 1700 of that is refundable. So a lot of taxpayers end up getting money back just by claiming their children.

[Nicole Lapin]

How to stop leaving money on the table.

[Carlton Dennis]

The vehicle write off code section179. Why is that one so popular? It's popular because people know that they can go buy a vehicle that weighs over 6,000 pounds in year one. On $100,000 vehicle, you may put $5,000 $7,500 down. But if you're writing off 100K and you're in the top tax bracket, which is 37%, that's a $37,000 write off minus your 5K down payment. You're walking away with $32,000 in savings in the moment you made that investment.

[Nicole Lapin]

And the legal loopholes, that can save you thousands. Let's talk about one of my new favorite tax moves.

[Carlton Dennis]

Children on payroll.

[Nicole Lapin]

Yeah, children on payroll. I'm Nicole Lapin, the only financial expert. You don't need a dictionary to Understand it's time for some Money Rehab. Carlton Dennis, welcome to Money Rehab.

[Carlton Dennis]

Thank you so much. I'm excited to be on here.

[Nicole Lapin]

So excited to have you. So excited to talk tax time, which I don't know if a lot of people say, but that's what we like talking about around here, really. I mean, now listen, let me caveat this, like not so much tax time, but tax hacks.

[Carlton Dennis]

Yeah.

[Nicole Lapin]

Like everybody wants to save money, everyone

[Carlton Dennis]

wants new tax hacks, and we're going to break down some tax.

[Nicole Lapin]

Yeah, you're the tax hacks, man. Say that 10 times fast. We have a little over a week before the tax filing deadline.

[Carlton Dennis]

Yes.

[Nicole Lapin]

Let's break it down between individuals and entrepreneurs and what someone can do to maximize their filing.

[Carlton Dennis]

Yeah, I mean, if you're getting ready to file your tax returns, hopefully you did your tax planning last year, but if you're at that point, you're trying to figure out if there's anything left I can do, it really comes down to the type of income that you're earning. And for most business owners, they're going to look at their deductions to see there anything that I left off or anything I can maximize. And inside of the tax code, you have one little tool left, even though you're past December 31st, and that's bonus depreciation, which allows for a business owner to take an expense all in one year, such as a vehicle that possibly weighs over 6,000 pounds or even camera equipment, laptop, or a forklift. Sometimes these taxpayers will have their CPAs depreciate these items over 5, 7 years, which is nice. You're incrementally getting the write off. But if you're trying to maximize your tax bill and you don't write a huge check, I recommend applying that bonus depreciation if you're self employed. And hey, if you're W2, I don't forget about you as well. Most W2 taxpayers are very familiar that they're limited on their deductions. But that doesn't mean that you can't take advantage of the child tax credit. For example, if you have a child, the IRS will provide you $2200 per child and 1700 of that is refundable. So a lot of taxpayers end up getting money back just by claiming their children.

[Nicole Lapin]

Okay, the bonus depreciation stuff was really big in the big beautiful bill. How many times have you read that thing?

[Carlton Dennis]

One big beautiful bill. One big beautiful. I say that one ten times fast. I've read the bill probably like seven or Eight times now, to be completely honest with you, is pretty easy to just extract the changes and then everything else was more or less fluff. But I love that we got 100% bonus depreciation back because I work with so many entrepreneurs.

[Nicole Lapin]

Yeah, I mean, I want to dig into all of the ones that you mentioned, like the section 179, which is known as the Range Rover tax deduction. I also wanted to make sure that somebody is not just buying a forklift, like for funsies for a tax deduction. Right. How do you think about those big purchases?

[Carlton Dennis]

Yeah, I mean, I always look at leverage because when you're a business owner, one of the beautiful parts about being a business owner is you could choose to pay for things cash, or you could choose to take out leverage and leverage other people's money. And, and with equipment or with vehicles, you can choose to put a small down payment down, but you might be able to write off the entire piece of that purchase. So we mentioned the vehicle write off code, section 179. Why is that one so popular? It's popular because people know that they can go buy a vehicle that weighs over 6,000 pounds, put a very small down payment down, but then be able to write off somewhere around 100% of that vehicle's purchase price in year one. On a hundred thousand dollars vehicle, you may put 5,000, $7,500 down, but if you're writing off 100k and you're in the top tax bracket, which is 37%, that's a $37,000 write off minus your 5k down payment, you're walking away with $32,000 in savings in the moment you made that investment. And so time value of money for many entrepreneurs tells them, well, if I keep more of my money right now, maybe I can reinvest it to make more money even though I had that car payment. So that's one of the ways in which the government has benefited taxpayers who are entrepreneurs to go and buy vehicles.

[Nicole Lapin]

But this has always been a thing. It's just gotten juicier since the big beautiful bill.

[Carlton Dennis]

Yeah, it was going to be 40% this year, meaning that 100,000 was going to drop to a $40,000 write off a lot less sexy. It just got pushed back up to 100% bonus depreciation. And that doesn't just exist for business owners who buy cars over, you know, £6,000. It's also for real estate investors as well who are leveraging real estate depreciation.

[Nicole Lapin]

And on the car, you have to Use this for work.

[Carlton Dennis]

Yes. Business.

[Nicole Lapin]

Right. And you're such a pro because you were like, you might be able to do this. There are always asterixes.

[Carlton Dennis]

Yes.

[Nicole Lapin]

What should you keep in mind?

[Carlton Dennis]

The asterisk is this vehicle needs to be used 100% for business. If you're going to take 100% bonus depreciation on the vehicle if it's not used 100% for business, then you have to determine how am I going to be able to write this off? Because the IRS says that the vehicle has has to be used more than 50% for business to be a tax write off. That means you're going to have to start tracking your time. And for many taxpayers, they don't do a good job of tracking their time. So what I would like them to do is I would like them to look at their week and determine which weeks are personal, that I'm going to be in my vehicle, and which, which days of the week is going to be business. For most taxpayers, Monday through Friday is going to be business and Saturday and Sunday is going to be personal. When we add that up, over the year, most taxpayers that are self employed are spending somewhere around 80% of the time in their business vehicle, 20% of the time personal. So being able to leverage that 100% bonus depreciation doesn't happen for every single business owner because not every single business owner is driving their G wagon seven days out of the week.

[Nicole Lapin]

Yeah, but I mean, I have this conversation with my accountant all the time. I'm like, you're entrepreneur. I'm like everything. I don't step out of the house unless it's business. Everything I'm doing is business.

[Carlton Dennis]

Absolutely. And I would encourage more people to use code section162A. It's my favorite tax code.

[Chime Representative]

What is it?

[Carlton Dennis]

Code section 162A states that a business owner can take a business deduction if the deduction is ordinary, necessary and reasonable to the business owner in the pursuit of income. And many taxpayers get so confused by this, they want a list of all the things that they can write off for their business. I'm a real estate agent. Give me the real estate agent write offs. I'm E Commerce, give me the E Commerce write offs. But the IRS website doesn't have a list of write offs based off of your profession. They don't know and they don't know, but they give you code section162A. And, and you as a taxpayer have to be willing to apply code section162A. To your situation to determine, well, what expenses are ordinary for me and my business, necessary for me and my business, and reasonable for me and my business in the pursuit of income. That's how you can write things off every single day when you walk out of your house.

[Nicole Lapin]

Oh, I have used this argument so many times with my accountant around. Clothes, specifically, they're like, no, it has to be the coat of armor or something like that. I don't know if they just made this up, but they were like, no, absolutely not. Unless you need it as a protection against weaponry or something. I'm like, no, this is absolutely part of my business.

[Carlton Dennis]

Absolutely it is. And one of the reasons why I let my taxpayers write off their clothing is if they are able to prove that it's a part of their uniform. So, as a taxpayer, I like to wear typically suits or typically blue. That's my color. And I'll mainly get most of my equipment that I'm wearing my clothing, because this is my equipment. When I show up to work, I get it embroidered with my name and my company's name. And then inside of my operating agreement, I state that we have a budget every single year inside of my operating agreement for clothing associated with my brand. And so I typically spend anywhere from 15 to $20,000 a year just on suits and clothing to swap out because I'm on camera and video, and that attracts revenue for my business.

[Nicole Lapin]

So just get it embroidered with a little logo and you're set, and make

[Carlton Dennis]

sure that you're wearing it. It has to be a part of your outfit or your costume. That's correct.

[Nicole Lapin]

Okay, let's call up the accountant right now.

[Carlton Dennis]

Absolutely. And you get all of those clothes that you know you're wearing for business embroidered.

[Nicole Lapin]

Okay, well, let's talk to the entrepreneurs who are still dabbling in their entrepreneurial endeavor. Let's say they're making, like, 5k on a side hustle, and they're not sure whether or not to set up an entity yet.

[Carlton Dennis]

Yeah.

[Nicole Lapin]

What would you say from a tax perspective is a good time to do that?

[Carlton Dennis]

I would say at $5,000, you're still figuring out whether or not it's a business. So you. Yeah, I wouldn't really focus on setting up an llc, but I would be thinking about it. For many taxpayers who are starting side hustles, you have to be very, very careful of reporting side hustle expenses. Over multiple years. A lot of taxpayers may only make a little bit of money, like $5,000, but then their tax returns show that they're having a $40,000 loss. Why is that? Well, that's because they're taking all of these other expenses that they wanted to write off as business expenses against other forms of income, such as W2 income they may have with their employer, or 1099 income that they may have being a contractor. And that's fine in the first year, and maybe it's even okay by the second year, but by the time you get to the third year and you're still reporting a loss and you don't have a lot of side hustle income to show for, the IRS might actually claim your business as a hobby business. And that's bad because they'll disallow your expenses that year, Then they'll go back to the previous year and disallow the expenses in the previous year, and they can go back up to three years to be able to do this. We've seen taxpayers who have claimed expenses and losses on their return shown a very small economic gain from year to year. IRS sends them a notice, questions their expenses, rules the business, a hobby. The whole thing blows up in the taxpayer's face. They're refiling tax returns plus penalties, plus interest fees. The whole thing becomes a mess.

[Nicole Lapin]

And you push it. Like, let's be, let's be honest. You try to get as much as you possibly can for your clients, which makes all the sense in the world. That's what the tax codes are there for to be used. But you have to be aware of what the red flags are as well. So if somebody is doing their side hustle and it's more of a hobby than a joby, but they're like, heard the podcast? I want to get a Range Rover. I want to deduct it. One year comes around, two years comes around, three years comes around. You say that's too long. What else is a red flag?

[Carlton Dennis]

Well, a big red flag is using categories on the tax return that the IRS has intentionally set up for people who are a little bit uneducated about how the tax system works. And the two primary categories that I always recommend entrepreneurs to avoid is other expenses and miscellaneous expenses. These two categories show up primarily on Schedule Cs, which is for sole proprietorships or single member LLCs. When many business owners are filing their own return or working with inexperienced tax professionals, they don't know how to categorize all their expenses. Is this marketing? Is this advertising? I don't know. Is it a tool? Is it equipment? Why don't I just stuff it into other expenses? Because I just don't Know what it is? Why don't I just put it as a miscellaneous expense? And when taxpayers have inflated categories on their tax returns like miscellaneous expense or other expense, these can sometimes be red flags and can subject you to an IRS audit. Not only do you have to also list out what each other expense is, it also brings a lot of exposure to your financial information because you're having to share so much. So I recommend taxpayers always work with, you know, a licensed CPA or tax professional when you're filing the returns and try to avoid those two categories, other expenses and miscellaneous expenses, because the IRS likes to go after those.

[Nicole Lapin]

How many times have you been through an audit?

[Carlton Dennis]

I've probably sat through 17 to 20 audits. My clients don't get audited that much. Last audit I dealt with was in2021.

[Nicole Lapin]

Is it scary?

[Carlton Dennis]

No, not at all. Most audits are not that scary. As a matter of fact, well, you're sitting across from somebody in a field audit. They have all the documentation in front of them. You have all your substantiation in front of you. Why, why you're claiming X is happening. And most of the time, if you do not have correct documentation, these audits don't go in your favor. So you're seriously up against the gun trying to prove things that you didn't have real documentation for. When you have a lot of documentation substantiation, an audit can actually happen pretty fast because they're just verifying things. It's like a teacher grading a test in front of you. Okay, this checks out. This checks out. This checks out, this checks out. And to believe it or not, 60% of all audits that we've dealt with have ended in the taxpayer actually getting money back. I actually found out that the the IRS agent made mistakes or that there was a mistake that we caught from a previous tax accountant when we were in the audit that we were able to address with the IRS auditor. Those are the funnest situations that end up happening. When the government said, oh, we want money from you. Hold on a second. No, no, no, no. You actually owe us a couple of more dollars.

[Nicole Lapin]

That is absolute best case.

[Carlton Dennis]

Yes, best case scenario. Of course.

[Nicole Lapin]

What would you say to people who are terrified asking for a friend about audits?

[Carlton Dennis]

Yeah, I mean, listen, I don't live in fear of the IRS because I view the irs like dentist. They are there to report things that you are already aware of. When you have a cavity, you already know you have a cavity. And you probably did things that led to you having a Cavity. You skipped, you skipped dental appointments, you're not brushing your teeth, you're not flossing. That's no different than a business owner not documenting or documenting their expenses, commingling their expenses and not keeping receipts. It's very simple things to be able to take advantage of the tax code, but you have to be willing to do the boring things right. And most business owners are moving so fast, they're making so much money, so they get terrified of the IRS because they've heard stories that the IRS can come knocking on their door or that they can place a lien on their home and that the Uncle Sam person is just an uncle that you never actually want in your family so they live in fear of this person. But if you, if you are educated on how the tax code works and you understand that it's an incentive program and in order to get all these benefits, you have to be willing to abide by specific tasks and rules, then you're going to be excited to go do those tasks and rules. You're going to be like, wow, if I do this correctly, I get this reward on the other end. I just need to make sure I love this process of using the tax code to get these rewards. And if I fall in love with this process, I'm going to fall in love with documenting. I'm going to fall in love with keeping my receipts. I'm going to fall in love with sharing with other people that I'm doing this correctly. Now I'm taking more videos and more documentation because I realize that the tax code is now a system that doesn't work against me. It works for me. It's a tool to help me grow and build my wealth.

[Nicole Lapin]

So you've fallen in love with the tax code?

[Carlton Dennis]

Absolutely.

[Nicole Lapin]

How much are you paying in taxes?

[Carlton Dennis]

I paid 0% in income taxes last year. This past year I'll probably end up paying somewhere around a quarter million in taxes off almost eight figure net profit.

[Nicole Lapin]

Is the goal to always get it down to zero?

[Carlton Dennis]

No, the goal is not to get it down to zero. This year I'll pay taxes intentionally. I personally would love to always pay 0% in income taxes, but paying 0% is not always the goal. And the reason I say this is because most people who pay a very little in tax but make a lot of profit have to reinvest a lot of money into tax advantaged vehicles in order to pay a little bit in tax. I have obtained so much in loans, debt in order to acquire so much real estate in order to acquire so Much depreciation just so I can offset my tax bill. Right. Don't get me wrong, I love having real estate. I love having tenants paying for my, for my properties, mortgages. But that's a lot of investment properties that I had to go get and that's a lot of liquidity that I had to put out in order to build that investment portfolio. I'm building wealth with the tax code and a part of that requires me to spend money or part of that requires me to get illiquid at times. And for many taxpayers, they may not like they make. It's uncomfortable. Carlton. Ah, interest rates have been super high. I don't know if I want to jump into real estate. Oil and gas have been super speculative. I don't know what's going on with the Hormo straight and all this other stuff going around the world. I don't know if I feel like investing in gas. Well, those are the things that the tax code wants you to do. Those are the legal incentives whether interest rates are high or not. The government needs affordable housing. They can't provide homes to everybody. So are you going to be a business partner with them and partner with them? We need energy right now. Orange county just had a blackout yesterday. What was that about? Interesting. We need energy. Are you going to invest in solar and oil and gas? So these are the things that the government can't do in abundance. So instead they'll write it into the tax code and say, hey, I'll give you a 30% tax credit if you go do this. I'll give you depreciation if you're willing to be a real estate investor instead of just a homeowner.

[Nicole Lapin]

If you go out and do this is the key point, right? You have to go and spend money to pay less in taxes.

[Carlton Dennis]

100%. That is correct. And that's how most of the tax code is set up. There's only a few strategies where you don't spend money to get money back. I know a few.

[Nicole Lapin]

So many people are like, but what about Elon and what about Trump and like, they're not paying any taxes. How, how come I have to pay taxes?

[Carlton Dennis]

Elon and Trump don't make the same type of income that many taxpayers make. Many taxpayers make earned income, Elong, and they don't make earned income. They make what's called portfolio income. They own corporations and they own investments. And when you own corporations and you own investments, you can take loans against your stock, which is non taxable borrowing against your own value of your company. You have liquidity to be able to go invest in assets that can hopefully give you an arbitrage on the debt of the interest rate that you took from your own corporation, your own stock.

[Nicole Lapin]

And a lot of this, as you were saying, is done through real estate, which means you have to put out money to get money off your taxes. Can we break down the bonus depreciation when it comes to short term rentals?

[Carlton Dennis]

Oh, yeah. When it comes to short term rentals, what the IRS says is that if you are able to run a Airbnb or VRBO business and your tenants are staying in the property seven days or less, you have what's called an active real estate business. But you have to follow one other test, which is material participation. And material participation means that you're actively involved in the day to day operations of the property up to a certain amount of time. Many taxpayers realize that the IRS has a rule where it states that if you spend 100 hours materially participating, you have an active short term rental or Airbnb business. Well, now, how do we get the depreciation from short term rentals to offset W2 or 1099 income? When you buy an investment property, let's just say the investment property is $500,000 and you put a 20% down payment. So a hundred thousand dollars down, you bought a half a million dollar asset. And the IRS is going to let you write off the full half a million dollars on your tax returns, excluding land value. So that write off of half a million dollars is going to be divided over 27 and a half years, which is the depreciation amount that you receive every single year over 27 and a half years. Many taxpayers aren't going to wait 27 and a half years to receive all of that depreciation. So you can implement a strategy to accelerate depreciation. And that strategy is called the Cost Segregation Study. The Cost Segregation Study is very simple. You're just getting the cost of all the things inside of the property cosmetically and outside of the property cosmetically that you can write off in a quicker amount of time. Things that would never last 27 and a half years, such as appliances, flooring, windows, doors, nails, drywall, heating, air conditioning, H vac. These items are never going to last 27 and a half years. And because with the one big beautiful bill, we have bonus depreciation now at 100%. Any of these items that aren't going to last 27 and a half years, you can write them off in one year. That is beautiful. But the only way you're going to be able to do this if someone did a study on your house. So you need two strategies here. You need the cost segregation study, which is done by an engineer and a cpa. The engineer comes to the house and takes and takes an estimate of all of the materials that make up the property. And then a CPA will come back and calculate how much depreciation you get. So if you would love to receive a $150,200,000 deduction on your tax returns by buying a 500,000 or $600,000 property, you can do so with a cost segregation study and bonus depreciation running a short term rental.

[Nicole Lapin]

How much does that cost?

[Carlton Dennis]

Cost segregation study is typically based off of square footage and can range anywhere from $1,000 to. I've seen some costs go as high as $25,000 on some larger scale commercial buildings. So. But they're always, you know, within reason relative to the tax savings that you're going to receive. Right. If you're putting a $5,000 investment into a cost, you're getting a $200,000 deduction. That seems like a win to me at a, at a 37% tax rate.

[Nicole Lapin]

So it's usually worth it.

[Carlton Dennis]

Yeah, it's. It's always got to be worth it before you make the investment.

[Nicole Lapin]

And I see a ton of videos out there about people saying they have W2 income, but they're paying $0 in income tax because of a short term rental and cost segregation studies. But there are for sure limits on that.

[Carlton Dennis]

That's correct.

[Nicole Lapin]

Can you explain?

[Carlton Dennis]

Yeah. The IRS has what's called excess business loss limitation rules, and they update these excess business loss limitation rules every single year. So last year in 2025, I believe, the excess business loss was 305,000 if you were single and about 610,000 if you're a married filing joint. What that means is that if you buy a short term rental and you do a cost segregation study, you accelerate the depreciation on your tax returns. You can only write off up to 305,000 of W2 income as a single individual, or up to that 610,000 if you're married filing joint going back to last year. And then in 2026, they did lower that a little bit further. But what this benefits you is, is that you get to claim those losses against W2. Anything that's excess losses will just roll over into the following year, ready to offset your new forms of income that you make in the following year. So we had a taxpayer last year that made about a half a million dollars W2 single. He used the full 305,000 excess business loss, had an extra $100,000 of losses that he gets to apply this year before the excess loss. Now since the losses that you don't use get rolled over.

[Nicole Lapin]

So overall you like short term rentals as a tax hack.

[Carlton Dennis]

I like short term rentals as a tax hack. But taxpayers have to be willing to run legitimate short term rental businesses or else they'll invest the money just to get the tax savings and then they have an asset that's not performing well and then they get pretty upset if they have to cover their own mortgage payment in the following year because they ran it as a short term rental just to get the tax benefits at the end of the year. And then the following year no one's renting their property because they never knew how to run a real short term rental. They never really got great furniture for it. And the photos look like every other listing that you see on Airbnb.com yeah,

[Nicole Lapin]

I worry about stuff like this because you actually have to then go deal with people like you do people want the short quick fix, right? Get a big juicy tax write off.

[Carlton Dennis]

Yes.

[Nicole Lapin]

But now you have a short term rental and now you have Bob in the rental and he's calling you and the toilet's broken. All this stuff like we have to fast forward what that actually looks like in your day to day life and if that fits with your lifestyle.

[Carlton Dennis]

100. You have to think with the end in mind. But one of the strategies that I like to give my clients, Nicole, is when they do a short term rental in the last few months of the year, let's just say October, November and December, they can get those 100 hours within a three month period. That's not too hard. But the IRS has no rule with you transitioning the property in the following year to a long term rental. If you ran the property as a short term rental for the last three months out of the year, October, November and December, you manage the property for 100 hours. Your guest stayed in the property seven days on average or less. We have an active property. We can do a cost segregation study, get the losses against W2 income and then right when January 1st hits, you can call up a property manager, transition it to a long term rental and now you have it Rand as a property managed by a paid property manager, you can then go get your next short term rental towards the end of the year. Only really manage real estate for about 100 hours every single year in order to be able to capture these losses. So this is a strategy that some of our clients will play into, is utilizing the short term rental strategy, but only timing it right at the end of the year so they don't have to run a short term rental for 12 months. Only three months out of the year.

[Nicole Lapin]

Oh, that's still a lot of work.

[Carlton Dennis]

Yes.

[Nicole Lapin]

Are you in this game?

[Carlton Dennis]

I used to be in the short term rental game. I'm no longer in the short term rental game, just in multifamily now.

[Nicole Lapin]

Why? Because it was a pain in the ass.

[Carlton Dennis]

Well, it was a breakthrough to get me and my wife to work together and for her to leave her W2 job. And that was beautiful. And as our businesses started to grow and we started to become more and more profitable, you know, buying short term rentals for our, Our tax strategy no longer made sense. Plus, I actually had other tax strategies that were giving me even bigger deductions than rental real estate at the time. So I started layering other strategies. I started moving into multifamily, which gives much better returns and actually has the ability to sell a lot better when you're looking to exit out of these properties in the future. And has been able to serve my investment portfolio and definitely my lifestyle as well.

[Nicole Lapin]

Another big popular real estate hack is the Augusta rule. Yeah, you talk about that a lot.

[Carlton Dennis]

The Augusta rule is a tax strategy that not too many tax professionals are familiar with. The Augusta rule was created out of necessity because in the state of Georgia state, there's a golf tournament that goes on every single year. It's called the Masters tournament. And unfortunately, back in the 70s, there weren't enough hotels and motels to house residents and tourists and travelers coming from out of town to be able to stay for the 14 days for that tournament. So you had homeowners that opened up their homes for seven days or for 14 days, the two weeks of the tournament to foreigners. And they were making a lot of money. The city, Augusta, Georgia allowed for those taxpayers to not report 14 days worth of rental income on their tax returns. The following year, it became a federal tax law code, section 2.80A. And now business owners are utilizing that tax code between their house and their LLC or their s corporations. What it means is if you have a business meeting or a fundraiser or a party that you like to throw for, for business purposes, you can go rent out a venue and go pay somebody else, or you can choose to rent out your own house. You can create a contract between yourself, since you live in your own house and your S corporation and rent your house to your s Corporation for 14 days. Maybe you're charging $2,000 a day and it needs to be fair market value. Well, that's a twenty eight thousand dollar deduction right then and there. You've just paid yourself from your S corp to yourself personally $28,000 and that income is non taxable. That is one way a business owner can immediately save money on taxes without having to spend money.

[Nicole Lapin]

So let me break down those elements. Do you have to own the house or can you be a renter? Does it have to be your primary house or could it be a short term rental? And then on the entity side, does it have to be an escort or could it be an LLC or a C corp?

[Carlton Dennis]

I'm glad you asked that. So those are three very important questions to ask. Number one, do you have to be a homeowner? The answer is yes. Number two, does it need to be your principal place of residence? Yes, it needs to be your primary residence. It cannot be a secondary home and it cannot be an investment property. It needs to be your primary residence. And the third one is, is can you do this in a single member llc? The answer is no. No, because the single member LLC is considered a disregarded entity and it's associated technically to your Social Security number. So if you're a sole proprietorship or a single member llc, the answer is no. If you're an LLC taxed as an S corporation or you are an S corporation, the answer is yes. If you're a partnership and you're a 1065, can a partnership do this? Absolutely you can. Can a C corporation rent out the place and be able to do it as well? Yes, you can do it through a C corporation as well.

[Nicole Lapin]

Is this why you're obsessed with S Corps?

[Carlton Dennis]

I am obsessed with S Corps because so many taxpayers stay in LLC is far too long versus doing the math to determine do the benefits outweigh the cost of them switching over to an S corporation to avoid some of the self employment tax that you pay as a taxpayer.

[Nicole Lapin]

Explain when you should switch over.

[Carlton Dennis]

Yes, it's different for everybody and is based off of your situation. But by rule of thumb, if self employment tax is 15.3%, you're paying that on all of your business's net profit over time. You can choose to take a salary from your business and only be subject to 15.3% on the salary you're taking out of your business. So in order to do that, you kind of need to be making enough profit to draw that salary. The issue that most people are unaware of is when you transition from like a single member LLC to an S corporation, there's just more compliance involved. Now you're issuing yourself a W2, you're filing a corporate tax return versus just a single member LLC tax return. So your administrative cost is probably going to jump from like maybe $1,000 a year when you're filing your single member LLC tax return to maybe closer to three to $5,000 a year. So if you're trying to save money on taxes just by switching over to an S corp, you're probably going to want to know Carlton, if I have to pay 3 to $5,000 to just be an S corp, when did the benefits outweigh the cost to me switching? And it's right around 50 to 60 thousand dollars in net profit. Right around that amount you can cut yourself a nice little salary of about 15 to 20 grand. You're only going to pay self employment taxes on the amount that you gave yourself in that salary. And let's just say the other 40,000 of that 60 grand is, is not subject to the 15.3% self employment tax. It's only going to be subject to federal taxes now and state taxes. So you might walk away saving about five to $7,000. That's around the time that somebody should be considering switching over to an S corp is when their profit is cross 50 to 60 grand.

[Nicole Lapin]

You call the escort a wealth machine. Why?

[Carlton Dennis]

Because the S corporation can be pretty awesome to play some games in. You can play games with how much payroll you give yourself and maxing what's called this QBI deduction. Hang on with me here. QBI stands for qualified business income deduction. And guess what, it's 20% percent. But it's only if you're underneath a certain amount of business profit. If you cross, let's just say for example over $400,000 in net business profit, you may not even receive any of this 20% QBI deduction. So I might strategically have you take payroll 100 grand or 200 grand, reducing your business's net profit so you can qualify for that 20% qualified business income deduction. Why is the S Corp so powerful? Because I can also help you avoid some of those payroll taxes if I choose to lower your payroll. So there's just different things that you can do with the S corporation that the LLC owner cannot do when it comes to compensation and qbi.

[Nicole Lapin]

What other considerations should people think about when they're opening or they're choosing their entity.

[Carlton Dennis]

Glad you asked this question. One of the biggest things that people should think about is what is going to be the name of my entity and what is going to be the state that I set up my entity in. If you're working in a 1099 capacity, you're self employed, you're most likely going to have that entity set up in the state in which you operate in. And that's completely fine. I'd highly recommend that you don't associate that entity to your primary residence address. Many business owners go right online and they go to Godaddy.com they get their website set up, they, they set up their LLC on know legalzoom.com they create the address associated to them and then they go pay for a registered agent and then boom, your information is public information. The moment I become an upset client with you, whether you're a doctor, physician, selling me T shirts and the tie dye off of the T shirt got on my beautiful skin, I can go online and find your LLC where it's associated to take your address, type it into Google, and now I can find information on who you are and where you live. Listen, one of the scariest things that my clients hate is when we see that their LLCs are associated to their home address, we immediately address it. On the first call with them, we pull open Google Earth and we're zoomed in on their primary bedroom. We're zoomed in on their primary bedroom and we're telling them, is this, is this what you want us to see and what you want your clients to be able to see? Absolutely not. How can we protect you? Because business is a marathon. It's not a race, it's a marathon. And in order for us to stay protected, you have to be protected from the irs. You have to be protected from creditors. Creditors are almost worse than the irs. Sometimes lawsuits can almost, almost punish you way more than the IRS can punish you. So can we structure you in a way to where your personal information is protected? So we end up amending their operating agreement agreement, amending their articles of organization, getting them a virtual address. So that way their public information, their children's bedroom, and the Google screenshots that were taken of their vehicle sitting inside their driveway is not information the world can now see. So where you associate that LLC is so, so important.

[Nicole Lapin]

But what about people that want even more privacy and they set it up in Delaware or in Wyoming?

[Carlton Dennis]

Yeah, this is when we talk about entity layering. So one of the beautiful things about having an, an Entity is you can have an entity that owns another entity. So if I'm operating my business here in California, well, California doesn't really have anonymity laws. So maybe I decide to set up an entity in California that's owned by a parent company in a state like Wyoming. You might ask, well, Carlton, why would you go to Wyoming? Well, Wyoming has different laws than California of such. One of the beautiful laws of Wyoming is Wyoming does not require managing members names to be at the public or county assessor's office. Meaning if someone looks up my entity in the state of Wyoming, they're just going to see the registered agent and the name of the entity, but you're not going to see the managers names, the members names, or the fact that that entity owns a California entity. So for many taxpayers who use states like Wyoming, Delaware, Nevada, they might be able to fly underneath the radar because of those states discretionary position.

[Nicole Lapin]

It's just for liability.

[Carlton Dennis]

Just for liability.

[Nicole Lapin]

And you mentioned an Alphabet soup. It reminded me of QSPs, which has also changed recently. So if you are an entrepreneur and you're starting to do really well and you're thinking about potentially exiting your business, why should you think about Q S, B S and why should you think about it early?

[Carlton Dennis]

QSBS is pretty cool because if you retain your stock ownership over the course of five years and you're structured as a C corporation, you can avoid capital gains. When you have an asset sale or, sorry, a stock sale, and you're exiting out of your business up to 40 million. And for some taxpayers, they might even be able to get a multiple on that up to 75 million under certain circumstances. Why is that powerful? I mean, prior to the one big beautiful bill, it was closer to about 20 million, 15 to 20 million. So for many business owners that were selling their businesses for, you know, $100 million, they're experiencing $80 million just hitting them all at once. I mean, that means the government's going to walk away right away with $30 million. Well, this just helped out many taxpayers that just put an extra 20 to 25 million right back in their pocket. Right. So if you're somebody that's considering selling your business in the next five years, one of the things that you can look at doing is what does it look like for you to transition from an LLC or an S corporation over into a C corporation? What is it going to look like for you to start paying yourself dividends or giving yourself a salary out of a C Corp versus taking distributions out of an S Corp? Because when you do transition to a C corp you will sacrifice some things. You will sacrifice the ease ability of just being able to transfer money from your checking account over to your personal checking account. You can't do that with the C corporation because every time you touch the money it's a taxable event. But if the long term vision is I'm going to sell this for a multiple, well maybe you make that sacrifice right now and you go to a C corp right now knowing that the qsbs is there to help you. This is just another incentive in the tax code that's written there to help you.

[Nicole Lapin]

Yeah, we started the clock for QSPs, switched over to a C Corp. It definitely is an added layer of complexity. That's a nice way to think about it. But also, you know, it is a big stream strategic move. And I think recently the big beautiful bill also allowed you to amortize different years. So before. Right. It used to be all or nothing.

[Carlton Dennis]

That's right. It used to be all or nothing. You can amortize different years and what one of the things that many taxpayers will also do, they might set up consulting S corporations to their C corporations. So maybe you have an operational entity that's the product and you're going to go take that product and launch it. And you want to go IPO or whatever it is that you want to do. But maybe you have a separate S corporation that operates as a consulting entity. Why would that be beneficial? Well, you want to keep profit as high as possible inside of your C corp because you want to have a strong EBITDA when you get ready to exit. But you don't want the double taxation. So you might choose to, your corporation might choose to hire your consulting entity to do consulting work for your corporation. And that's one way in which money can move over from a C corp to an LLC or S corporation where you're able to take distributions that are untaxed. This gives many taxpayers who are self employed the ability to control money without it being taxed.

[Nicole Lapin]

Yet how do you, you're looking at me like, you know, I'm looking at

[Carlton Dennis]

you like I feel like you're, we're tax planning right now. I'm like, okay, she's, she threw the qsbs at me for a reason. So I'm eager to hear offline some of the things that you're working on.

[Nicole Lapin]

That's exactly what we're doing.

[Carlton Dennis]

That's awesome.

[Nicole Lapin]

So let's talk about one of my new favorite tax moves, you two. I have a 15 month old daughter.

[Carlton Dennis]

Children on payroll?

[Nicole Lapin]

Yeah, children on payroll. I mean, children are so expensive. I think it's time they earn their keep. So I pay my daughter?

[Carlton Dennis]

Yes.

[Nicole Lapin]

Do you pay your daughter yet?

[Carlton Dennis]

I do pay my daughter now.

[Nicole Lapin]

Okay, and what should people keep in mind when they're putting their kids on payroll?

[Carlton Dennis]

You have to keep in mind reasonable compensation. I know we all want to max out 16,100. 16,100. That's the new standard deduction. What that means is, is that you can pay children up to 16,100 without them needing to file a federal tax return. Depending on your state, you may still have to file a state tax return because states have different standard deductions. But let's just stick with federal for right now. The big thing is that when you're employing children, they have to be doing reasonable work and making reasonable compensation. A lot of taxpayers understand that they can make their children child models. But are they actually child models? Are you actually taking photos? Are you just keeping some photos inside of your iPhone? You need to be intentional about it. It needs to be on the calendar. You need to create a contract with them. You, you need to have a bonafide intent of what they're doing and you need to transfer the money to them. The smart thing to do is also to take it a step further and to look at a Roth IRA. You can set up a custodial Roth IRA for your children, tuck away another $7,000 for them, and that money's growing tax free in a tax advantaged nature. And for many taxpayers who start this process very early, I believe at the age of five, you can put in 7,000. And by the time your child is 60 years old without making one one additional contribution, there should be nearly about a million to a million one inside of that account. So that's a very powerful wealth building tool for an entrepreneur that wishes to get their children involved.

[Nicole Lapin]

I think it's 7,500.

[Carlton Dennis]

7 500, yes. For the Roth IRA, 7,500.

[Nicole Lapin]

And so is that what you did with your daughter?

[Carlton Dennis]

Yeah. So we're placing my daughter on payroll. We didn't give her the full 16,100. We gave her just enough to where we can make the full contribution into the Roth IRA. And that was intentional. One, I don't believe there are too many, you know, two year olds making 16,000 in the year. I can't spot too many of them online. But that being said, because of the amount of involvement that my daughter did have as a child model supporting us on social media. We decided to make that contribution to her Roth IRA after we made the payment to her.

[Nicole Lapin]

And you alluded to how powerful the Roth can be because the tax treatment, when you take that money out, it comes out tax free. A lot of people don't realize that when they take their traditional IRA or their 401k out, you have to pay taxes.

[Carlton Dennis]

And the reason why I'm always going to advocate for the Roth, especially right now, is because one, we're in the lowest tax period that we've ever been in, at least in the last 50 years. This is the lowest tax rates that we've ever had. And two, when I ask people, do you think taxes are going to go up in the future? Most people will tell me yes. I mean, nine in ten people tell me, you know, I feel like taxes are eventually going to go up. So if you think taxes go up, only have one direction which is up, does it make financial sense to just put everything into a traditional or a traditional 401k knowing that you have no idea where those tax rates are going to be when you can make the sacrifice right now, go Roth 401k or Roth IRA, pay the tax to know and have that peace of mind that when you draw it out later it's 100% tax free.

[Nicole Lapin]

But the catch is that you can't make more than 153k as of 2026.

[Carlton Dennis]

But you know, the tax code has its games.

[Nicole Lapin]

What you can do in two steps you is legal that you can't do in one.

[Carlton Dennis]

It's called the back door Roth IRA and it's becoming increasingly popular. What you're doing is you're making a non deductible traditional IRA contribution. You're putting in the 7,500 knowing that you're not going to be able to deduct on your tax returns intentionally because what the IRS will allow you to do is flip it into a Roth IRA that doesn't allow you for to pay the tax on that 7,500. So you can get that money pushed into a Roth IRA account and then grow in a tax advantage nature.

[Nicole Lapin]

And you can do a mega backdoor Roth as well. And what does that look like?

[Carlton Dennis]

With a mega backdoor? You're making a contribution by. Well, there's two ways to actually do a mega back door. I'm going to talk about the self employed who's doing a mega back door. If you're doing a mega back door, you can give yourself a salary and set up a SEP IRA and contribute up to $69,000 to a SEP IRA and then convert the SEP IRA into a Roth IRA account, pushing more than $69,000 into a Roth account all at once.

[Nicole Lapin]

Do you advocate for self directed Roth? So you hear all these headlines about Peter Thiel growing billions of dollars within a Roth that you don't have to pay taxes on?

[Carlton Dennis]

Yes. So the self directed Roth IRA is actually something that not too many taxpayers know about. But if you choose to, you can direct your investment funds to yourself, controlling what assets you wish to invest in. You can choose to invest in a business, you can choose to invest in real estate. There's taxpayers that we have that own section 8 properties inside of their Roth IRA just completely paid off, just cash flow in inside of there. You can invest in some, some types of private equity deals through your Roth ira, some types of rates through your Roth ira. And everything is in a tax advantaged nature. Everything's growing tax free. Free. One thing to keep in mind is that the money does return to the Roth ira. Any deductions that you're receiving, such as rental, real estate, deductions, depreciation, the IRA receives those deductions.

[Nicole Lapin]

And you can't have your own business.

[Carlton Dennis]

You can have your own business. Absolutely you can. Yeah. If you have a self directed 401k.

[Nicole Lapin]

I can invest in my own business.

[Carlton Dennis]

Sorry. Oh no, no. You cannot invest in your own business through a Roth ira. I thought you said can I have a business and then and set up a self directed Roth ira.

[Nicole Lapin]

No, but like the big thing that were talking about with Peter Thiel is that he owned part of PayPal. And so putting something that you have

[Carlton Dennis]

shares in the Roth IRA was growing in a tax advantage nature. Yes, but your own business interest cannot be invested through the Roth ira. You're correct on that.

[Nicole Lapin]

What are some crazy tax hacks that people might not know about?

[Carlton Dennis]

Some crazy tax hacks that I really like now is leveraging film investments. This is probably the one that I've spent a lot of time on over the last year. IRC 181 allows taxpayers to deduct 100% of production costs in the United States if the movie film is filmed in the United States and remains under $20 million. Now I'm not a movie person that's going to go and create a movie, but I sure do like watching Netflix and Amazon Prime. And what movie producers will do is they'll sell or finance the production rights of the movie film to investors. As an investor, you're taking on recourse debt. Plus you have your at risk capital. The money that I'm putting at risk to invest in the movie film, you're taking on a loan to get the rest of the ownership of the movie film. And the loan is deductible, just like when you buy a vehicle. So we have taxpayers that put in, you know, $100,000 into a Jackie Chan movie or Mark Wahlberg movie and they're getting a leverage deduction, a $400,000 write off in year one with material participation. They have to spend 100 hours watching other movie films and being involved in the direction of how they direct their dollars into that movie film. It's a pretty, pretty awesome tax strategy. And so with material participation, the at risk capital, our clients like it because it gives them consistent cash flow. Movie films do provide a consistent cash flow. The cash flow does go back to pay the recourse debt, but at least they were able to get the sizable deduction in that first year that they made the investment. So it's a way in which they can, you know, be exposed to something that's a little bit uncorrelated to the, you know, public markets like, you know, real estate and being something that can also provide cash flow, how do you

[Nicole Lapin]

find a deal like that?

[Carlton Dennis]

Movie production companies are. Our advisory firm is actually pretty close with a lot of the production companies here in California. And when they get film projects that they are going to put 181 financing behind, we get contacted and we're able to offer these opportunities to our clients.

[Nicole Lapin]

What's a tax scam that people should watch out for this year? Because it's just getting.

[Carlton Dennis]

I would watch.

[Nicole Lapin]

And crazier with.

[Carlton Dennis]

I would watch out for charitable LLCs. Right now. There's a lot of taxpayers are that are looking into setting up these charitable LLC structures where the charity is or where there's the ability to donate money that's going to acquire land through a charitable LLC structure that provides a 4x leverage deduction or a 5x leverage deduction. And a part of the charitable LLC structure allows for you to be able to have your own investment LLC where you might be able to take loans to it. I don't like that structure at all. I think that it can be abused. I think that it's structured in a way that doesn't protect taxpayers. A part of that is being pitched by attorneys that are stating that investors are able to pull their money together and do this as a group, almost like a fund to shield investment dollars. And the whole thing just seems like Tax evasion to me, for lack of better, for lack of a better term. And if you're someone that's watching this podcast right now, there's so many other vehicles that you can set up where you can be philanthropic without having to go through a, a not very well structured charitable LLC structure in order to just get a multiple on your investment dollars. And so what it's being pitched as is if you put in like a hundred thousand dollars into this charitable LLC structure, you might be able to get a five hundred thousand dollar charitable deduction on your tax returns, which is pretty awesome. That person that has those excess business loss loss limitations that we were talking about earlier doesn't have to worry about that because that has nothing to do with excess business losses. It's not a business loss. It's a charitable deduction. Right. You can take as much charitable deductions as you want. So that is something that I would just be very cautious about.

[Nicole Lapin]

You can, you can't take as much charitable deductions as you want, can you?

[Carlton Dennis]

Well up to 50% of your adjusted gross income or 30% with cash.

[Nicole Lapin]

Are there other AI driven tax scams

[Chime Representative]

that you're worried about?

[Carlton Dennis]

Oh, that's really great. None. None that I have seen thus far. But we were having a conversation around AI and tax and the fact that many taxpayers are using AI right now as tax consultants and getting their tax information documented. But the one thing I would caution them of, which is fine, that they want to use AI to help make things easier in the tax world, is just keep in mind that if you're using AI to validate what you're doing, AI does not represent you in the IRS courtroom. You will have a human being there, not AI, and you will have to represent yourself. Unless you have a CPA or tax professional. And if you did all your consulting with AI and then you go hire a CPA and tax professional, you have to go re explain everything to him and almost guarantee it's not going to go the way you would want it to go. So I always caution people that are using AI for tax strategy advice still keep your tax professional on your team because they're the one that's actually going to end up dealing with the audit and signing off on the tax return.

[Nicole Lapin]

Makes total sense. And don't upload everything.

[Carlton Dennis]

Yeah. And don't share everything with AI. Right. I mean, there's a lot of financial information that you can choose to provide AI in order to get data given back to you. But uploading your EIN reports and sharing Social Security numbers and data that is really meant to be personal can, can end up hurting you in the future.

[Nicole Lapin]

Well, there are so many tax hacks and it's so exciting to think about all of the options that you could do and all of the strategies that you could implement. Where do you think the balance is right? Like, should you just live your life and do the best within these parameters or should you really be gearing around these particular strategies so you can save the most possible. It's like the tax tail wagging the dog. Like, should you make decisions purely based on tax ramifications?

[Carlton Dennis]

Absolutely not. No. There, there becomes, you know, that divide where lifestyle and peace of mind matter far more than attempting to take actions that you know can take you away from moments and memories in your life. That being said, the cost of not knowing is very great. Those who choose to never approach the tax code don't, don't realize what they're sacrificing. The tax code can give you the ability to invest instead of overpay, the ability to be present with your family, the ability to not spend three, four or five months out of the year simply working for the irs. So I absolutely believe it's a tool that can help you and open up more freedom in your life. And at the end of the day, I believe all of us want the same thing. We just want more time to spend with our families and loved ones with the absence of fear of money. And that's what the tax code is able to provide to you.

[Nicole Lapin]

We end all of our episodes by asking our guests for a final investing tax money tip that they can take straight to the bank. We talked about so much already, but what else? One more you mentioned family foundation.

[Carlton Dennis]

It was literally the last one I wanted to give. You know, people think philanthropy is just about giving money away. It's a wealth building tool. At the exact same time, the wealthy have been using foundations and so many ways than just let me just write a check. You can write a check, which is totally fine, but many people that have foundations are controlling wealth. There is no capital gains tax inside of private family foundations, which means you can own precious metals, real estate stocks it could appreciate to whatever amount. There is no capital gains tax. You do not have to donate all the money that's inside of a Foundation. Only 5% of the assets inside of a foundation have to be donated every single year. You can contribute your own cash to a foundation outside of just stocks are highly appreciated assets and be able to take up to 30% of your adjusted gross income as a year, one tax deduction in the following year. If you don't want to make any more contributions, IRS says that's totally fine. Your foundation can be a non performing foundation and you can just take a year off or two years off. As long as you stay within IRS compliance and you file your returns reporting information, it's a hundred percent compliant vehicle. Many taxpayers also that are utilizing the private family foundation who wish to be philanthropic with family will hire their family members inside of the private family foundation, which then that becomes an income shifting strategy. They're shifting income to a private family foundation and then shifting income downward from the foundation to children or family members that might be in lower tax jurisdiction. So it's just a great wealth building tool when done correctly.