C-Corp Tax Strategy: Build, Borrow, Die — Full Breakdown & Transcript

[00:00] I want to talk about a tax hack. This is crazy, and this isn't, you know, personalized tax advice for you, but I think this is one of the craziest tax hacks to consider. And a lot of people forget how things can be structured like this.

[00:15] And so, we'll start at the most extreme level, and then we'll kind of work back to how this can be applicable to starting out, because it's a lot more challenging.

[00:27] So let's showcase exactly how some things can be set up. So at the most extreme, most extreme level, and then we're going to get to the more personal slash less extreme level.

[00:41] So we're going to take all the ideas from the extreme and apply them. So here's the most extreme, or just, you know, partly. It can always get more extreme, okay? Talk to your CPA, obviously.

[00:54] They're not taxing the price. But something to think about. Here's an extreme strategy for tax savings when it comes to expanding wealth. And it's called build, borrow, die.

[01:07] We'll have to clarify this because people are going to be like, wait, but Kevin, you're a big fan of paying off debt. This is true right now where we are in the market cycle. But let's explain this. So the first thing that you have to know is a lot of people, when you first take like a business or finance 101 course,

[01:24] The first thing you hear is the C Corp is evil because of double taxation. Okay? The first thing that you have to unbuild here is false. You have to look at the C Corp as actually one of the most beautiful potential structures

[01:39] as long as it's an operating business. It has to be an operating business. It could be an operating business you work for as an employee, and you have stock comp in. That would work.

[01:51] So this would be either stock comp in that company, so participation in that upside, or you're a controlling owner, right? Ideally, I mean, there are shareholder rules around this and all that.

[02:03] So for most people, it's going to be stock comp, which is fine. But what's very interesting here is here's what you could do with a C-Corp. If a C-Corp makes, let's say, $100 of income, the C-Corp is going to pay about, and we'll use California as an example.

[02:21] We'll see what state taxes. We'll pay about 21% of taxes and about 9% of state. In a different state, you don't even have to pay the 9%, right? That's going to leave you with about $70.

[02:33] Compare that to a personal level. If you have $100 of income above a certain income threshold in California, let's say, just to be fair, you're looking at the highest tax bracket, which is, I want to say it's like 37.9%.

[02:47] This changes all the time, so just correct me on this. You're going to be paying somewhere around 12, probably in a half percent in California as a state tax. Plus, you've got the Obamacare. Boy, I should really fact check some of these percentages, but it's somewhere around 3%.

[03:00] The point is, when you total this up together, you're paying over 50%. So, whatever the numbers are, you're at over 50% in taxes. So, now all of a sudden, on the personal level, your efforts are bringing $50.

[03:16] so you have employees or whatever it is doesn't matter, your efforts are bringing $50 in in this example the C corporation actually has an arbitrage because in this example the C corporation did

[03:28] not pay that extra $20 in taxes which on a percentage wise means the C corporation has $70 you have $50, the C corporation has 40% more

[03:40] look at it on a percentage basis 40% more investable capital. So money that they could turn around and reinvest, reinvest into the business,

[03:52] right? That's exactly what could be done with C-Corporation at a 40% improved rate over somebody who's paying the taxes themselves. And obviously, the theory would be even if you took out the state tax here or the state tax here,

[04:04] it's roughly the same percentage, right? So you go to a zero income tax state, fine, you pay 21%, and then over here you pay maybe 31% or 41% or something like that. So in that case, you're left with $69 over here.

[04:20] Sorry, this would be, no, $40, take out $70, about $59 over here is roughly what you're left with, right? Let's see, 37.9 plus 3%, 40.9, 100 in here,

[04:33] 59.1-ish, somewhere around that. And then over here, you're left with the inverse of 21, so you're left with $79. So 79 in that example divided by 59.1, still about 34% more.

[04:47] So 30, we'll clarify that here. That's 34 to 40% more investable capital that you can reinvest. Guess what Buffett did? Exactly this. Buffett purposely, Buffett took a salary to cover his living expenses,

[05:06] and the rest was wealth built on stocks. By the way, if you feel overwhelmed because there's a lot of content we produce and share, no worries. We made a simple email list once a day.

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[05:49] Just scan the QR code or go to the link in the description and we love to have you there It the same for people like Elon Musk Okay Elon Musk borrows against his stock in the C That where the build

[06:06] borrow, die comes from. You build a business, turn it into a C-Corp, you borrow against the shares in that corporation as collateral, and now you don't pay any taxes. Because when you borrow,

[06:19] You don't have to worry about this double taxation. Sure, you're going to pay taxes on your salary. Yes, but that's an expense to the corporation anyway. You would be paying this portion anyway. But the point is, rather than taking big distributions from your business,

[06:35] inside of T-Corp, you leave that money sitting in an operating business. It's actually much easier to reinvest in that business. And look this up. Make sure it's applicable to yourself with your TPA, right? It's got to be there. Generally, you have to have enough income for this to make sense.

[06:48] But we're going to talk about how this applies to the less extreme level in just a moment. But this is something that you should look forward to. It's actually building, in my opinion. So you build this. You can borrow against that C-Corporation wealth in the future.

[07:02] When you borrow, you don't pay any taxes. The other beautiful thing is that when a C-Corp goes up in value, let's say a C-Corp is worth $100,000, and in 30 years it's worth $10 million.

[07:16] dollars. You own 20% of it. Let's say you own, you know what, screw it, you own 40% of it. It doesn't really matter, right? That's $40K to $4 million. Now you get hit by a bus

[07:30] and you're dead. Your family gets a stepped up basis, which means your basis of ownership in that company's stock went from $40,000 to $4 million. And now your family doesn't

[07:42] have to pay taxes because you have a stepped-up basis. Now, obviously, if your family inherits all of your shares, at some point, you know, you're going to hit the, um, what's it called, the family

[07:54] gifting limitations. It's the estate tax. That's what you're going to hit. You're going to hit the estate tax. This is what I think. There's so many nuances. Talk to your CPA. You'll hit the estate tax, which I think is somewhere around $26 million. Fast-check this again.

[08:06] It also changes. But Donald Trump massively exploded the estate tax. What a surprise. When a lot of Republicans want, right? So anyway, so you get this massive explosion in the estate tax that helps you sort of move this. What people do is they'll actually divest portions of their share ownership

[08:22] over time. That's what Trump does with the Trump organization to Ivanka and Don Jr. and otherwise. So this is at the higher level of wealth. But now I'm going to show you something

[08:34] else that compounds into this that's even more ridiculous. Okay? And it has to do with real estate. So real estate gets really interesting here, and that's going to be relative to this

[08:46] section as well. So real estate does something really unique for you. So let's say, say you over time own, you know, or it could be your corporation, could be the corporation, which

[09:01] a lot of people are like, oh my gosh, don't own real estate in a corporation. That's fine. The C-Corp could be the holding entity, right? It doesn't matter if the property itself is in an LLC. The C-Corp could be the holding.

[09:13] That part really doesn't matter. Just talk to an entity person on that. Let's say over time you own $10 million of real estate. Okay, the cool thing about that is that $10 million of real estate, you're going to get to depreciate that straight line. You're going to depreciate $360,000 of depreciation per year on a straight line basis.

[09:32] So what that means is you are actually saying any income that I got up to $360,000 after the operating expenses, after salaries, after whatever bull crap, any operating income above that, that comes to the bottom line that would otherwise be taxable, is going to be taxed at zero because that depreciation comes in and offsets that.

[09:59] Now, a lot of people will say, oh, but Kevin, you know, you depreciate properties because you're going to have to, you know, fix them up. But we buy properties and then fix them up up front.

[10:11] So that's already built into what we're depreciating. So it's not true when you buy a fixed property and then fix it up. Where it is true is that you do have to maintain properties. The properties already have a cost of goods sold and it's a maintenance section. And I'll tell you, I'm not spending on $10 million of real estate $363,000 a year in expenses on a new roof or a new furnace or whatever.

[10:33] On $10 million of real estate, what's that going to be? 10 or 20 homes, just for example? I'm not replacing even two rooms a year in that portfolio. So it gets a little loony when people look at depreciation and say, wow, that's a really cool benefit.

[10:48] So real estate inside of a holding entity like this is actually a really glorious strategy as well because then if you have higher margin income, you can now offset that higher margin income with real estate depreciation inside of the C-Corporation wrapper.

[11:03] Can you do that? And obviously it offsets the rent that you're getting as well, which is a form of return on your investment there. But you usually get depreciation that can help you get way beyond that. It's fantastic.

[11:15] Because you're writing off taxes, So your property taxes, your insurance, your maintenance, your management, your utilities, your reserve. That's great. So, and even if you have rental income coming in, that's rental income that you're not paying taxes on, right?

[11:29] Because of that depreciation. That's the point. So how can you apply some of these lessons to yourself more personally? And so you start at this sort of extreme level where the same thing over here was real estate over time, the stepped up basis, all inside of the C-Club.

[11:43] The remarkable thing to keep in mind about real estate inside of a C holding company is it never actually has to change hands So like if I sell you 10 shares of a holding company that owns real estate there is no deed transfer on that real estate which means the

[12:00] local governments don't come around and go, you sold. We want to reassess your property taxes. Nope. Same company still owns it. So, you actually avoid reassessments by holding inside of a larger

[12:17] entity like this when you hold real estate like this. Now, on a more personal level, like, how can this apply? If you or your child spent years growing up on social media and experienced serious

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[13:10] yourself or a loved one. It's quick, easy, and you can recover a potential recovery of over $1,000. Now, on a more personal level, like how can this apply? The number one thing that I personally

[13:26] think everybody should do is everyone should try to justify 750 hours a year in real estate. You get a real estate license, manage your own properties, you know, let AI help you do it.

[13:40] You're looking for properties, comping, renovating, whatever. Because Inc. now lets you write off unlimited losses. Verify all this with your CPA.

[13:52] Against your active income from real estate. So now, if you're a plumber, let's say, and you run a plumbing shop and you're making $300,000 or you're a doctor or whatever it is.

[14:04] and then you have real estate depreciation losses, I can now take those depreciation losses, which is dumb because we know most of the time real estate's going up in value over time anyway, we're going to take that, we're going to offset it against our income over here.

[14:18] Can we do the same build, borrow, die? Yes. In fact, it's even easier on the personal level. On the personal level, you should separately take on real estate loans for your spouse.

[14:38] Why? Because you can only have 10 Fannie, Freddie conventional loans against your social security number.

[14:50] That's a hack. So 10 against Kevin, 10 against Lauren equals 20, baby. you each need a salary to be able to pull that off. No problem. You run a business, you have the ability to build that.

[15:04] Perfect. That's what I'm saying. This is more advanced. This is once your income's higher and you've got that investable capital. But this is what you want to go towards. This is what you want to build towards because now you can take properties

[15:17] and offset your own personal income against real estate depreciation and now you're reducing your personal taxes. Now if you want to take out money, you can

[15:30] because you can cash out refinance out of these puppies as rates come down over time and you're not paying taxes. That's the same strategy that you could do over here. It's just harder for a corporation to follow because you're not going to get those conventional loans.

[15:44] You're going to typically get what are called debt service coverage ratio loans which are fine if you go for the fixed rate full term. Fixed rate fully amortized loans, I'm okay with that. That's fine.

[15:56] And it's not going to be as juicy as the Fannie Freddie crap that you could get over here. But this does, this lower section requires you have a credit score that's good. Typically over 740 is the ideal credit score that you want.

[16:09] So that's 740 plus. At the corporate level, it really doesn't matter. It's the company's assets that end up getting qualified, not a personal credit score. So if you're using a C-code strategy, you're not, you know, this really matters a whole lot less.

[16:22] But most people are going to start here. And what happens is a lot of people will actually start outgrowing their S-Corp. S-Corps are great if you're an individual, you know, who's working a business, you're growing a business, you start getting employees or whatever, great.

[16:35] There are serious S-Corp advantages here. But the S-Corp, I would say, great between 80K, you know, under that, you know, is it where you're really going to save anything under 80K, maybe, so maybe go like 60K.

[16:49] Under that, it's not going to make sense to have an S-Corp. You're paying way more money in filing and bull crap. You'd just be paying as well be a sole proprietor, in my opinion. 80K is honestly not more useful of a number. But anyway, anything between 80 to probably 300K,

[17:03] that's going to be in your living expense zone anyway. And then you have some leftover investable capital. It's probably not big enough yet to where C-Corp makes sense. C-Corp makes sense above that level, in my opinion.

[17:18] But there are a lot of people that sit above that level that are still paying 53% in California on their damn income when that could be going into a C-Corp and you could have 40% more investable capital.

[17:31] Now, the company can't just be an envelope. It has to actually be an operating business. It could operate a real estate, whatever. But it must be an actual business And so people treat the C as evil But the reality is like every stock you buy in the stock market is a C for this reason It actually pretty phenomenal

[17:56] So, I'm a big fan of that. Now, the, okay, this is actually a good question. I think that's relevant. So, well, thank you for donating $25. I do not want this donation, though, to be considered by Gavin Grusom as personalized advice.

[18:12] I want to be clear here. What I'm about to say is not personalized advice. I don't know your situation, so I'm going to take the spirit of what you're asking, and we will answer it generically. Next question, $250,000 profit, self-employed marketer in an LLC.

[18:26] Yeah, which is full pass-through, right? So it's all going to you, so I don't know what state you're in, but it's basically all you. And if you haven't paid your quarter lease, you have to write a damn check soon for like $100,000,

[18:39] and it's going to suck. you maxed out your 401ks looking to section 179 a cyber truck to wipe out the property exactly, because the cyber truck is probably going to run you 100 grand yeah, worth doing

[18:53] or bite the bullet and just pay the taxes alright this is going to sound wild because it's like one of those things do as I say, not as I do, but like I have done that

[19:05] plenty of times but I've also had the regret so I've done both so I did that I bought a Sprinter van in like 2017 for a business and then I realized I didn't need it

[19:17] and so I was really happy when I was jumping up and down because I took you know you could take a loan out on it just like you could take a loan out on the Cybertruck and you could write off the whole car for business which is fantastic because it weighs enough

[19:29] and so I did this with the Model X as well so I did this with the Model X although that was limited by 1 7th of the depreciation plus $25,000 back then. The Sprinter was a

[19:41] full write-off because it was a cargo vehicle. Some special rules related to it. But anyway, I kept the Model X, but I sold the Sprinter. You sell the Sprinter, now you have to pay that money back. Depreciation

[19:53] recapture. Then, I 179'd a jet that I bought for $12.9 million. So when I sold the jet, I had a

[20:06] beautiful tax bill today. you know, whatever. It was like four and a half million dollars or whatever. Isn't that great? So, it's not a free lunch.

[20:18] Because it's not a free lunch, you have to really have the cojones to know that you're going to keep that vehicle and you're going to drive it into the dirt. My Model X, I have had since 2017,

[20:30] and rather than sell it, I gave it to my dad. And so now he does. And honestly, it's not really worth anything anymore anyway because it's really old. You know, my fiber truck, I bought, and I just paid cash for it.

[20:43] Yeah, I mean, I drive it out too, and, you know, I'll probably keep that thing forever. So I think it comes down to a personal decision. You have to be careful. Sometimes tax benefits can seem like a great idea, but it's very easy to ignore that if you sell that thing,

[20:59] you're going to have to pay it back, the tax benefit back. the so 179 is a great temporary solution that can really bite you in the butt and then sometimes I

[21:12] just look at it and say look man if I'm trying to save that money on taxes 100 like is there is there real estate I can invest in instead you know is there or do I just pay the taxes and just invest the money into the NASDAQ and QQQM or or SPYM right not personalized advice but uh but then

[21:29] the tax of the pay and you don't have to worry about it anymore. Like, ultimately, a vehicle is a form of butter. And so you have to be really careful investing in butter. You want to invest in hard assets. And that's what I think is so cool about this tax strategy

[21:43] is that it actually enables investing in hard assets. Investing in real estate, investing in the stock market, you're investing in train America. You're not like, this isn't, oh, hey, you know, what's the market going to do tomorrow commentary. This is kind of like

[21:56] a little tax primer that I feel like a lot of people don't openly talk about and they miss. Heck, if you have employees and you're investing into creating something that's new and useful,

[22:10] like an app for your business or an app that you can license, other people, hey, we do it. We have the Reinvest app. That was a Meet Kevin app. We're putting a lot of money into research and development for making that better and better and better. and those could generate tax credits, research and development tax credits.

[22:27] That just goes on top of these other benefits that we talked about here. So tax credits from solar, research and development, so clean energy or solar or the future, like you want to buy a Tesla, sell my charts.

[22:43] Those are all things you could do inside of these sort of entity envelopes and really take advantage of tax strategies that a lot of people don't think about. So I'm a big fan of these, and I was inspired to make this because I just know so many people are so anti-the C-Corp, and they forget how much more you could actually grow a C-Corp.

[23:03] When you take the structure, when you look at what Buffett did, it starts making more sense. Wow, how are you able to compound that much? Wow, wait, you actually paid a whole lot less in taxes than an individual trying to catch up would.

[23:17] So cool, huh? Obviously, a lot of details there to fill in, but it's something that's designed to provide some info for you. If you like that video, change this around. I think you're going to love it. I know I advertise any thing that you tell the field. I feel like nobody else knows about it.

[23:31] We'll try a little advertising and see how it goes. Congratulations, man. You have done so much. People love you. People look up to you. Kevin Passer, finance analyst, and YouTuber. Meet Kevin. Always great to get your take.