Watch now on video:
Tune in to hear as Josh talks to Craig Cody about Tax reform and learn:
- How the tax changes that have just been enacted are going to affect physicians.
- Advice for physicians that are going more the private practice route and working with a CPA.
- Where are the winners and losers with the new tax reform?
- If physicians are paying less in taxes, what does that enable them to do in the real estate market?
Josh Mettle: Hello, and welcome to the Physician Financial Success Podcast. My name is Josh Mettle, and this is the podcast dedicated to helping physicians avoid financial landmines. As we jump into today’s interview with Craig Cody, it’s gonna be exciting. Craig Cody is the president and founder of Craig Cody and Company. He is a tax coach, and he and his team specialize in providing advice to physicians, dentists, small business owners, helping them pay as little as possible, as legally possible, in taxes.
Craig is also the co-author of Secrets to a Tax-Free Life, which sounds pretty awesome to me, so Craig, without any further ado, thanks so much for joining me. How are you today?
Craig Cody: I’m great. Thank you very much for having me. I’m really psyched to be here.
Josh Mettle: Ditto. Your background as a New York City police officer, which was then a launching pad for your current career as certified tax coach–I love that–is very interesting. So just give us a little bit about your background and tell us how you connected those dots.
Craig Cody: Oh yeah, well I went to school as an economics major. My dad was a police officer. Where I grew up, that’s what you did. You went into civil service. Took the test for the hell of it. Three years into college, said, “I wanna do this.” Had a good run in the police department, and I wound up retiring as Lieutenant. Along the way, I got interested in taxes and decided I wanted to become a CPA. Worked for someone for a few years in an international firm, and went out on my own, and did what we all do. About six and a half years ago, we started focusing on tax planning, which is really helping clients keep more of what they make. So that’s the brief-
Josh Mettle: Now that’s the goal.
Craig Cody: … 60 second. Yeah.
Josh Mettle: Yeah, and you know, we didn’t script this, but somewhere in this conversation, let’s talk through, maybe at the end, just so I’ll give you some time to prepare, but just a little bit about maybe how the tax changes that have just been enacted are going to affect physicians, good, bad, or indifferent. But before we do that, I wanted to just kinda jump in and ask your advice. We see a lotta clients who self-prepare their taxes, and what I’ve noticed is that their financial acumen is not as good as their medical acumen, and so I see sometimes that it looks like the business of medicine, and I’m talking about either independent contractors or people that are paid on a K-1 or even own small practices, but their tax knowledge is not as great as their professional knowledge in medicine, and they get themselves into trouble. Tell me just a little bit about your experience and your advice for physicians that are kind of going more the private practice route and working with a CPA.
Craig Cody: I think they should find a professional CPA that they can work with and let them worry about the tax and accounting stuff, and communicate with them regularly, but focus on where they make their money. The doctor isn’t the person making the appointment for the person coming into his office, all right? So he probably shouldn’t be the bookkeeper, and he probably shouldn’t be the person preparing the taxes. So where is his time better spent?
Josh Mettle: Yeah, no doubt. You know, what I see on my end is not really grasping the numbers. I’ve had many clients who come to me and they say, “Well, you know, it feels like we’re making money,” but when you look at their tax returns, oftentimes I’ve seen practice loans. They’ve been using loans to kind of supplement income, and they feel like they’re making money, but they’re not, and so I think the idea of having a tax preparer to give advice and to help you navigate the numbers is really important. Now, how do the changes in the tax laws … Go ahead. Sorry, Craig. Were you gonna say something?
Craig Cody: Well, yeah, they definitely need to be working with somebody and communicate with somebody, where it’s not just a matter of preparing taxes. It’s looking at your numbers, and if you have a practice, you should be looking at them at least monthly and seeing, okay, where are we? Are we profitable this month? How do we stand versus last year at this month? And stuff like that, because you may think you’re making money until the end of the year when you realize, “Oh, jeez, I didn’t make that money and I funded this with loans.” That’s not a good thing.
Josh Mettle: Yeah. You know, my side hustle from doing mortgages and from the podcast, my mother and my wife and I, we co-own about 125 rental units, and she was our previous landlord-tenant lawyer, so she can set up LLCs and look at partnerships, and one of our practices, one of our best practices, is that every month, we get a P&L for each one of those entities, and we sit down, and we say, “Okay, are we positive, or are we negative?” When you own real estate, you can be negative, but it wasn’t a negative really out of the cashflow of the business. It’s just that you decided to do some capital improvements, but what I found is consistently, when we sit down as a group and review those P&Ls, it really helps us make better decisions.
If you don’t know how to create a P&L, if you don’t have some expertise in how to set that up for your business, then you never gain that knowledge that you do by watching your business and studying your P&Ls monthly.
Craig Cody: Yeah, there’s a lot of information when you look at a P&L, a lot of information.
Josh Mettle: No doubt. Okay, hey, well let’s switch gears here. I wanted to hear your perspective on the tax reform, and specifically, where are the winners and losers, from private practice or W-2, and how do you think that will impact most clients in 2018?
Craig Cody: Okay, well, we’re actually almost finished writing our latest book. It’ll be our third book, and it’s going to incorporate the new tax changes into it, and we talk about physicians and private practice owners, we’re really talking about Section 199, and how they can best utilize that. What Section 199 is, it has to do with pass-throughs, which, if you’re an S corporation or an LLC, you’re a pass-through, and it has to do with a 20% deduction for you K-1 income. So there’s huge planning opportunities there, and part of the huge planning opportunity is, if doctors are specifically singled out amongst accountants, consultants, and a few other professions where if their taxable income is between 315 and 415 thousand, that 20% discount–I’ll call it a discount or tax deduction–is going to be phased out to zero.
So there’s a huge planning opportunity, and they should all be communicating now with their CPAs and advisors to figure out how are they gonna deal with that and what can they do to really maximize that deduction?
Josh Mettle: I think that’s a piece that most people probably are missing. They’re thinking, “Hey, there’s been tax changes in 2018. Come 2019, I’ll converse with my CPA or accountant and try and figure out how those things are gonna impact,” but what you’re saying is that we’re early enough in the game in 2018 that you can implement some strategies that you can’t implement first quarter 2019. They need to be implemented now throughout the year in order for them to work in your favor.
Craig Cody: Very well said.
Josh Mettle: Okay, great. That’s really good. I agree with you. I don’t know if you can answer this in broad strokes, but in your opinion, in the majority of cases, if you’re a W-2 physician, or a 1099 independent contractor, or a private practice or K-1 partner, how do you think overall, physicians are gonna fare in regards to paying taxes, this policy versus previous?
Craig Cody: Overall, I think if they do some planning, they’re going to fare well. If they don’t do any planning, they could be in for some unpleasant, what I will call surprises. Maybe they’re just resigned to paying more tax, but if they do some planning, they may be able to and they should be able to really reduce that tax liability.
Josh Mettle: Yeah, I read a bunch on the changes, and I wrote an article on how I think these tax changes will have implications on real estate values, and whether it’ll be positive or negative and … Bless you. What I thought was interesting was, most of the coverage around the tax legislation was about if we can write off our state property taxes and how much mortgage interest deduction we could have. There was very little, from the real estate side anyways, analysis on, well, okay, do consumers, or individuals rather, have a lower tax bracket or a higher tax bracket, and if they’re paying less in taxes, what does that enable them to do in the real estate market?
And then you look at corporate taxes that have gone down drastically, and what might that impact be with there either being share buybacks, or dividends paid, or just corporations deciding to make more investments locally? You saw a couple weeks ago, a week ago, Apple just came back and said that they were gonna pay $38 billion in taxes to repatriate all of their foreign assets, and so now, where is that money gonna go to play? What are your thoughts kind of in a more macro sense on how the tax changes might impact housing or the economy?
Craig Cody: I think it’s going to have a positive repercussion. We’re still waiting for the Treasury Department to put out their revenue procedures, and we believe that real estate and pass-through real estate is going to be subject to the 20% deduction, which is a good thing, but there’s certain things that when it comes to that 20% deduction, it’s up to a percentage of wages, and some real estate has no wages, and then it’s up to 25% of wages, or two and a half percent, plus two and a half percent of the book value of the original asset, so there’s a lot of things that we’re waiting for Treasury to come out with, but I would say, from the rental market and the commercial market, I think in the end it’s going to prove to be a good thing.
On a personal side, you discuss the cap on real estate taxes and state income taxes. What some people don’t realize is that depending on where you are, if you’re subject to AMT under the old rules, those things were being added back anyway, so it might have looked pretty on your return, but you really weren’t getting the benefit you thought you were getting, so now that we have this cap, it may not have as big of an impact as people may think. And then as far as the mortgage deduction, the 750 versus the million, that does not apply to rental real estate. It’s only basically has to do with your personal residence and your second home and stuff like that.
I think when it all shakes out it’s going to be positive. We’re still waiting for Treasury to come out and write some rules, but there’s huge planning opportunities, and when you talk about C corporation rates are 21%, that creates another huge opportunity to do things where, if you need to be under that $415 thousand mark, so … We’re actually going back and planning with clients that we’ve done plans for in the last six months to actually adjust for these changes, and so far, everyone’s happy.
Josh Mettle: Well, I think you make a good point. The devil’s in the detail. When will those rules be issued by the Treasury?
Craig Cody: I wish I had a crystal ball.
Josh Mettle: Okay.
Craig Cody: We are not sure. We’ll have to see, but we hope there will be guidance soon.
Josh Mettle: Fair enough, fair enough. All right, so the other thing I was interested in, I was hoping you could maybe walk us through your process. So let’s say I’m a 1099 independent contractor physician, or maybe I’m a partner and I receive a K-1. What’s the process–and I love your title of Certified Tax Coach–what’s your process as a tax coach to help me pay as little taxes as humanly possible?
Craig Cody: Our process as a tax coach is really integrated into our whole CPA firm, and it starts with a conversation with the client or potential client, a review of his business and personal tax returns, then we do an analysis. We have a meeting, typically via Zoom or Skype or something like that, and we go through our analysis and we look and we figure out, okay, we can save you 20, 30 thousand dollars a year in taxes by making some adjustments. We do a plan. We help the client implement the plan.
Then when the client becomes a regular accounting client of ours, every month, we set up a Zoom meeting and we review the P&L, so we make sure the accounting is up to date. We go through everything, and then we set up a meeting, which is … Each client has a bookkeeper, they have a CPA assigned from my office, and they have me, and we go through that, so it’s a long process, but once you get it all set up and going, this way now your business owner knows exactly what’s going on in his business, what did he do that month, proceeding month, and which direction he’s moving.
Josh Mettle: You’re offering a … Go ahead.
Craig Cody: It also gives us the opportunity to make sure they’re doing all the things we put together in that plan, so they take advantage of the recommendations.
Josh Mettle: Yeah. Well, you’re doing way more than just … There’s like the base level, which is TurboTax. Just fill in the blank. And then above that would be a CPA helping you fill in the blank.
Craig Cody: I like to call it putting the right numbers in the boxes, which is no planning, but they put the right number in the right box, which is, you know, it’s a good thing. It’s better in the wrong numbers in the right box.
Josh Mettle: Well, where I was going with that was early in my career, as my mother and my wife and I were just building our first rental property, we probably had somewhere between 12 and 15 rental units, and at some place around there, it kinda hit critical mass. It was like, okay, either get serious and do this right, or you’re done. This is as big as you can get this thing.
I’m so grateful that we had a CPA that was similar to you that, I don’t think he’s grown to the scale that you have, but he took my wife in and trained her how to do QuickBooks, had her send the monthly QuickBooks in monthly for him to look at and to help her class, and for the first year, he really coached her. That was 14 years or something like that. Fourteen or 15 years ago, and now, as I look back, if we wouldn’t have had that coaching early on, we really couldn’t have gotten bigger. It would have been a really limiting factor to our business, so I think what you’re doing there with the coaching and someone that you have monthly looking at those numbers is huge for your clients.
Craig Cody: Yes, and what he did for you provided huge value for you.
Josh Mettle: Absolutely huge value. I mean, he literally taught my wife QuickBooks, and not only did he teach her QuickBooks, but he taught her QuickBooks the way he wanted it done, so that it was efficient for him to understand and to do the numbers, so I … If you’re self-employed, if you have a practice that you’re running, if you’re managing expenses and you wanna grow, I think that it’s impossible to do to as full as an extent or the most profitable without a service similar to what you’re offering, so wonderful there.
Hey, so what else should doctors know? If there was one or two nuggets that you could maybe impart, or pieces of advice, is there anything that you could leave us with to share with our listeners?
Craig Cody: Yeah. The big thing I like to impart on people is, you went to school. You learned a lot. You spent a lot of time and money in honing your craft. Now, you need to make sure that you’re working with somebody that you communicate with on a regular basis and they communicate back with you. If you’re communicating with somebody, it’s really going to give you a lot of benefits, so that’s the golden nugget. It’s not, use this strategy, or use that strategy. It’s, if you communicate with somebody, all right, and they know what’s going on, they should be giving you a lot of strategies.
Josh Mettle: Yeah, I think that’s wise. You know, I’ll have conversations with clients on a regular basis where they’ll say, “Oh, I’m selling this property and I’m gonna buy this property,” and I’ll say, “Okay, have you maybe looked at what that’s gonna cost you in terms of tax consequence?” And they’ll go, “Oh no, I didn’t really think about that.” I’ll say, “Okay, well think your tax bracket. If you sell, there’s $80,000 dollars there, and you haven’t calculated your basis. You haven’t calculated your gain. You may get $40,000 of that in taxes, and if that’s the case, maybe we should take out a home equity line, or maybe we should use some other strategy like a 1031 exchange.”
Craig Cody: Correct, like a 1031, or there are a couple of others, high-end strategies out there that you could use, but you’re right. There’s that phantom income, and when you have to catch up on that depreciation that you’ve already took, and paid taxes-
Josh Mettle: That’s right.
Craig Cody: … on that. You should definitely be communicating with your CPA and going over what are the implications of what you’re gonna do, because there might be a better way to do it, and hopefully they are going to tell you the better way to do it, but if you come to them after the fact, there’s not a whole lot they can do. So the key is really communicating with that person and making sure they communicate back with you, and if they don’t, it’s a wide world of CPAs out there. Find one that will.
Josh Mettle: I think that’s a great place to end it for today. So hey, Craig, thanks for sharing so generously with us. I appreciate your time. Now, you have several books. There’s also a tremendous amount of literature on your website. Where can people start to get educated and learn more about you if they wanna climb, and your contact information as well, please?
Craig Cody: Sure. Well, we’re going to give you a link for your landing page to get a free copy of our latest book that’ll be out in about two weeks, and that’s www.craigcodyandcompany.com/pfs, the initials for your podcast. There, they can fill out a little form. They’ll get a copy of our book. They will have all our contact information. They could also email us at firstname.lastname@example.org, or the phone number is (516) 869-4051. The book’s gonna be packed with stuff, so all good stuff in there, so everybody’s welcome to it.
Josh Mettle: Thanks, Craig. I really appreciate you and the value you shared. We’ll put those links in the program notes down below, and I’d love to circle back with you, Craig, later this year, and maybe update things once the Treasury Department comes out with the final rules, and have you give us kind of 2.0 on this conversation if you would.
Craig Cody: Now that sounds great. That would be wonderful.
READ OUR FULL ARTICLE: Tax Reform and its Potential Impact on Housing.
To learn more about Craig Cody, visit his website: www.craigcodyandcompany.com/pfs