Eric & Melissa Broughton - Saving Thousands of Taxes In Real Estate
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Busy Bee Advisors was established in 2017 by Melissa Broughton, a seasoned accountant. Identifying the benefit to business owners of having a single resource for their accounting and tax services, husband Eric, a tax professional, joined the company in 2020. Together, with more than 20 years of combined bookkeeping and tax experience, they are living their passion for helping small business owners and real estate investors gain financial clarity in their business. In addition to their work with Busy Bee Advisors, they host a popular podcast called The Real Buzz, designed with small business owners in mind who are serious about reducing their tax liability.
In this episode, you will be able to:
- Learn how to maximize your tax savings and protect your assets with smart planning strategies.
- Discover the importance of setting up the proper company structure for your real estate business.
- Learn how to maximize deductions to keep more of your hard-earned money in your pocket.
- Understand the significance of working with a tax professional to navigate complex real estate tax laws.
- Stay up to date with changes in the tax code to ensure you're always making the most informed financial decisions.
The key moments in this episode are:
00:00:00 - Leveraging Properties for Buying Power
00:01:36 - Getting Started in Real Estate
00:08:41 - Benefits of S Corps
00:11:53 - Importance of Engaging with Accountants
00:14:54 - Understanding Corporate Structure
00:16:25 - Simplifying Entity Structure
00:20:28 - Client Education
00:24:04 - Tax Code Changes and Credits
00:26:28 - Reaching Out for Help
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Eric & Melissa Broughton
Are you using these properties to leverage with each other to generate additional buying power? So those things all have to come into account when you are pushing things forward. But when you want to start with it, keep it very simple, and don't keep properties in your name directly. Right. Keep it in an LLC. That's my first and foremost recommendation, is to put your properties into an LLC because you want to make sure you separate your investment from your household.
Mike Swenson
Welcome to the REL Freedom show, where we inspire you to pursue your passion to gain time and financial freedom through opportunities in real estate. I'm your host, Mike Swenson. Let's get some REL Freedom together. Hello, everybody. Welcome to another episode of REL Freedom, real estate leverage Freedom, talking about building time and financial freedom through different opportunities in real estate. I am your host, Mike Swenson. And for those of you that are looking to get started in real estate or look to scale your journey within real estate, you can feel free to check out our website, freedom through realestate.com. It's just a great spot for you to be able to learn and grow and figure out what your next steps are. And today is going to be an incredibly valuable episode for those of you that are in your early stages or looking to maybe tweak and scale and grow and not necessarily sure how to best help in regards to taxes and bookkeeping and finding the right professional for you and helping you along your journey. So today, we've got a husband and wife duo here, Eric and Melissa Broughton, and they are with busy bee advisors. And so they've launched their tax and bookkeeping business a handful of years ago and really helping on focusing on business owners and also realtors and investors to find the right professional, help them in their journey, and really be a good asset along the way. So if you've been trying to do it on your own, now's the time to throw in the towel, call in the pros, and help. And so they also have a podcast called the real buzz, designed for small business owners who are serious about reducing their tax liability. So welcome, Eric and Melissa. We're excited to have you.
Eric & Melissa Broughton
Thanks so much.
Mike Swenson
Mike, why don't you go ahead and just share a little bit about your background, what you guys did before you launched your business together, and kind of what you're doing now, and we'll take it from there.
Eric & Melissa Broughton
Well, mine is pretty boring. So my background was in corporate finance and accounting. In 2017, I left a controller position and decided that I would kind of scale back a little bit while our kids were still. While our oldest was still in high school, and I started the firm in 2017 and we kind of took off really quickly. In 2019, Eric left his previous position and decided to jump on board. And it's been a lot of fun, I will say, ever since, my travel.
Eric & Melissa Broughton
And path to where I'm at now has kind of been a windy road, but it seems like I always make my way back to the real estate, real estate trade through one way or another. I used to be a superintendent and I used to build new single family residences, and here I am back now, helping real estate agents here locally and nationally to find the best fit for their business structure and kind of help them plan for what they want to do, not just alleviate or take care of what they're currently doing.
Mike Swenson
Let's kind of get started. For people that are thinking about maybe a business idea and how it's evolved and changed over time, but for somebody that's just getting started in the real estate industry, maybe it's as a realtor they're going to get their license, maybe as it's a real estate investor or something they want to do in real estate. What are some of the things that they should be considering as it relates to setting up a company and that sort of thing? I always talk about I'm a recovering perfectionist because I'm a detail oriented admin person. And a lot of times those folks in the industry that really push pedal down, it's hard for me to want to go faster. I know sometimes I need to go faster. I want to have all my ducks in a row, but kind of walk through that balance of, I've got an idea, maybe I want it to be something, maybe not, but how do I make sure I've got the proper set up and all that?
Eric & Melissa Broughton
Okay, so the first thing you want to do is kind of look at where you're at and where you want to go to. If where you're at right now is that you have a w two job and you have one rental, right. That's a pretty easy and simple set up. If you're looking, expanding past that, maybe losing the w two job and making your way up to six doors or ten doors or 20 doors, you really want to look at what your corporate structure needs to look at as you're going through that direction. So I recommend in that instance, you start by getting the LLC right. That's your standard limited liability corporation. It protects your personal assets from your investment portfolio, and then you make the next step that's going to be filed as like a schedule c. I don't want to get lost in too much of the minutiae because Melissa tells me I do that I nerd out on all the have. So I'll step back a little bit to a broader picture. You need to protect yourself and your business, and you also make sure that you have a real responsibility to yourself, to make sure that you are fiscally responsible to what you're trying to achieve. And the best way to do that is to get away, first and foremost, from the schedule c sole proprietor self employment taxes. That 15.3% on your net profits is excruciatingly painful to watch people pay. So move towards an S corp corporation or partnership. Now, which one of those is going to be best for you? It depends upon who you're working with. Scorps are great to start out with. Partnerships, also good to start out with. The downside about partnerships is that you're splitting everything with someone else, and you may not be splitting the expenses evenly. So maybe that's not the right route to go. So let's focus on s corps.
Eric & Melissa Broughton
Just back up for a second. So I think what a lot of business owners don't understand is that the automatic default, if you don't make a choice, your automatic default is a schedule c. So if you make no choice, you go to school, you take your classes, you take the real estate exam, you become a licensed agent. Maybe you take it a little bit further and you become a broker or you're an investor. Your default for your company is a schedule C. And as a schedule C, you're hit with a double taxation. And we want to urge and help. It's almost like it's a public service announcement. We want to urge and help people to understand, to move away from that as quickly as possible.
Eric & Melissa Broughton
So going into an S corp, there are a couple of rules that you need to follow. And of course, all of this stuff is predicated on you need to talk to your tax professional. And when you have an S corporation, you can use it to do so much more than you could, as if you were for a sole proprietor or even if you were in a partnership. Being an owner of your own company. But also being an employee of the same company has a lot of benefits because you own the company. So you get to decide to a large degree how the employees and how employee benefits and maybe employee reimbursements are set up. So when you look at the overall picture, you really want to work with your tax person on saying, okay, this is where I want to go to what am I currently at, and how can we reduce that? And on average, working with clients, just by showing them a couple of different things, moving to an S corp, things of that nature, shows them that they save anywhere from $15,000 to $35,000 in a year on their tax liability. Now, imagine you're doing that same thing now for ten years, you just saved yourself $150 to $350,000 in tax liabilities that then you could outright buy one or a couple of properties with that tax money that you save.
Eric & Melissa Broughton
I'll say that the tax system is rigged, but it really is. So the system is set up so that you, as the consumer or the client, tells your, if you're using a tax preparer, tells your tax preparer what you think is relevant information, the tax preparer then just enters that information onto the appropriate forms and your taxes are filed. Where we. And by we, I mean Eric and I, where we really found that there was such a need in this industry, was that we felt that clients deserved education and almost like an advocate on their side of explaining to them things that they could do or things that they should be doing and really working with people to pull that information out. So asking those questions, I mean, I'll hear him on the phone, and it's kind of funny because his appointments are generally supposed to be 45 minutes or an hour, and I'll be looking at my watch, and it's like, wow, he's been on the phone for an hour and a half with somebody. But it's really that he's just so dedicated, I should say we're so dedicated to just pull that information out of people, the things that people don't realize that they necessarily need to provide.
Mike Swenson
We were talking offline before we started the recording. Just how people may assess, is their tax person doing a good job based on how much they like them or based on how much money they get back at the end of the year? And the reality is there's so much more. There's this huge thing that you don't understand that I would advise. It's the tax professional's job to kind of educate on what you're missing out on by how you have it set up. As a realtor, we talk about, hey, I can help you get the highest price for your home. And somebody might not choose, let's just say the best realtor out there that can get them the top price, and they choose somebody else because they really like them. Well, that person might have sold their home for $15,000 less than they could have. And they're happy that they had a good experience, but they left $15,000 on the table, and that's kind of the same thing here. You don't know what you're missing out on unless somebody points it out to you. And that's the challenge because, yeah, if you like your tax person or you get a rebate back at the end of the year or refund, you think they're doing a good job. But what you don't see is what's out there that's missing, and it's up to you guys to kind of point that out to them.
Eric & Melissa Broughton
Well, most of the time when you get a refund, you're getting back a portion of what you already paid throughout the year. Right. So if you've got a w two job or you pay quarterly taxes and you get a refund, it's not, in my mind, a woohoo moment. I feel that most of the times, if I can get a client and I get it set up just to the point where they get a refund that's around $500 or less, or they pay around $1,000 or less, then I did a good job because we narrowed it down to what was actually paid throughout the year and cash flow that was not available throughout the year. You got a CPA. What are you currently talking to? Your CPA, your enrolled agent, your tax preparer, your accountant. What are you talking to them about? Right? Or are you talking to them at all? I mean, most of the time you get an engagement letter at the beginning of the year, maybe in December or January, saying, hey, tax season is starting up, let's get our contract. And maybe here's an organizer for you to put your stuff together and send it over. And then you submit your information. Maybe you have a review with them. Maybe you review it by email paper, and then they file the taxes, and then you don't hear from them until December, at the end of the year or January of the next year. So how often are you engaging with your accountant saying, hey, here are my books, take a look at them. Am I short somewhere? Does it look like I'm over in other areas? Can you help me out with that? Does your CPA say or your accountant say, how many children do you have in the household? Are they employed by your business? Should they be employed by your business? Do you have a home office versus having a brick and mortar office or having both of them? How are you working the synergies of those potential deductions and making your life easier by having greater access and making things that go from being a personal expense in your home and pushing them over to a business expense. How do you do that? How do you turn that vacation trip that you want to take your family on and also at the same time have it be, if in part or not, all of it covered as a business related? How do you go through that process? How do you dot your I's and cross your. The one of the biggest things I hear from people is, you know, I've been with my accountant for a long time and I haven't been audited, and I just feel that that's the best way to go. There's no such thing as a safe bet the IRS will come in. The IRS doesn't send you a letter saying that you missed deduction. They'll never do that. You'll never submit your taxes, and they'll say, oh, you forgot to include your home office or your mileage or something of that nature. They're looking for things that are abnormal or you fit a certain class of qualifications that they want to do. An audit. You can't necessarily predict what you do with your taxes is going to trigger an audit group. There's lots of people out there that use the term red flags, and I kind of really dislike that because here's a red flag. You've got a schedule c business. That's it right there. That's a huge red flag as far as the IRS concerned, because that's where a lot of people maybe are not as honest as they should be in reporting how much they made or how much deduction wise was actually there.
Eric & Melissa Broughton
It's fair to say that the corporate structure is just, I'm just kind of trying to bring it back because there's a lot of information you're given to people. The corporate structure or corporate entity is kind of one of the tactics we look at. There are so many other things. As far as maximizing your deductions that we look at with our clients, we really are just very passionate about working with realtors and real estate investors. We've had a chance to speak at a couple of conferences. We've had some very entertaining and interesting travel experiences as a result of those conferences, but they're such a unique group. So I'm quite thankful that we're able to be on your podcast.
Mike Swenson
Now, one question that popped up when you were talking about maybe you start out, you've got one investment property, maybe you started your llc. For people that are growing their portfolio, sometimes I hear people say, hey, every single property should be in its own entity from kind of a shelter perspective. If something were to happen, sometimes that leads to a lot of difficulty in terms of taxes and filings and bookkeeping and all that. So as people are starting to grow, maybe by the number of properties or the numbers of doors, is there any tips or advice you can give for people in terms of trying to keep it simple yet safe in terms of how they grow and strategic.
Eric & Melissa Broughton
When you open up an LLC and you decide whether or not to put one property or multiple properties in it, the question that you need to have is, am I isolating this asset and protecting it from the rest of my asset and why? So if you get one property and you put it into one LLC, then that means that if something happens with that one property, in most instances, I'll say that it stays with that one property. So if you have five doors in one LLC, then those five doors are all subject to each other's woes and wheel and woe. So you have good things that happen within that bubble, and then you may have something negative that happens in that bubble, but it stays in that bubble. But it comes down to complications or making it complicated. It really comes down to how you want to protect yourself. So if you want to put every property in its own LLC, that's fine. You just need to collectively report that income through one structure or another. So if you have an S corp and you're just a sole proprietor on that, then you do need to report that income on an individual basis. If you have everything in llcs and then you have an s corp that's managing the properties as a managing company, then you have to report the taxes on the properties individually. But then you also have to report the management income generated through your S corporation. The level of complication can go from being somewhat very simple to being this broad web of potential confusion. And that's where you need a good accountant to look at what you have going from a top view, where you want to end up being, do you have ten doors, each one of them in their own LLC? You have an S corp that you're managing all of the properties, and the properties are individually owned by you. You need to look at that and then have the accountant ask you the questions of where else are you going to go with this? Are you using these properties to leverage with each other, to generate additional buying power? So those things all have to come into account when you are pushing things forward, but when you want to start with it, keep it very simple. And don't keep properties in your name directly. Right. Keep it in an LLC. That's my first and foremost recommendation, is to put your properties into an LLC, because you want to make sure you separate your investment from your household.
Eric & Melissa Broughton
Well, and I think one of the things that Eric really excels at is not just because I'm married to him, that I think this, but one of the things that he really excels at is making sure our clients understand why they're doing what they're doing. Totally different industry that. He had a consultation a few weeks ago with a lady who owned a jewelry making business, and her and her partner sold exclusively at Farmers Market. So somebody had convinced them to set up an S corporation, and so they had this s corporation that they had paid a significant amount of money for. They had no understanding of how to stay in compliance with the s corporation, and they really didn't need it. It was almost, I think, the analogy you used, like having the whole fire department come over to rescue the cat in the tree, it was totally overboard. So we really want our clients to understand why we're making the recommendation, and sometimes it takes. I know you've had multiple conversations with clients until it seems like they grasp it. Eric, isn't that true?
Eric & Melissa Broughton
Well, you did mention that my meetings sometimes are scheduled for 45 minutes, and I'm on for an hour and a half, because I want to make sure that a client has an understanding of why I'm making the suggestion that I'm making and that they become comfortable with the concepts that are being told to them. There's a lot of the times where I'll meet with a new real estate investor, maybe has three doors and works a w two job. And I talk to him and I start picking at what he's got going on to get information out of him. He's like, oh, yeah, I own all three of them, and I just collect the money and I pay the mortgage on it, and all of a sudden, done. I'm like, are the properties held in an LLC or. No, I decided not to go with any of that. And I'm like, well, okay, there's some work we need to do, right? Because there's no sense if you're going to go through the process of developing, you also want to go through protections, you want to have both, and you want to have scalability, right. Once you start doing something, you want to be able to easily do it over and over and over again with each new property without having to try to reinvent a wheel for the entire structure. Why not build it to start for the concept of scalability? And then you got people that go, well, why not do a C Corp? C Corp is a completely different creature, although the tax benefits for that is great. You're talking someone that's in the neighborhood of half a million to a couple of million worth of rents. That's where you want to start looking at c corporations as being your vehicle versus having an s corp with the LLC.
Eric & Melissa Broughton
Our industry is a little bit, I don't know, I guess it can become a little bit dry if we're not too careful. But we definitely try to take the approach of understanding where our clients are at and helping them to get the most benefit out of our services.
Mike Swenson
Yeah, well, and I think it's important for the listeners to understand this may not be for many people, it may not be your favorite topic, but that's why it's important that they have people like you out there to be able to help them. And you've got to be able to kind of endure that conversation to set you up well for the future because, yeah, you might be paying thousands of dollars of taxes or you might be exposing yourself to huge amounts of liability when you haven't done this well. And so it's kind of like you can't be an ostrich in this scenario and just bury your head in the sand and hope that everything's okay, because there can be lawsuits that come out, and if you don't have things properly set up, they can come after your personal assets and they can come after the other things that you've worked so hard to build. And so I think what people need to understand, listening to this is there's a lot at stake here to have this done well and to be able to ideally reduce your tax liability to open up more doors for the future to be able to grow. To open up more doors, literally, for the future to grow your real estate holdings. Right. And so if you're able to save thousands of dollars of taxes, that's now thousands of dollars of purchasing power, that you have to continue to grow your business or to find other properties or whatever that might be. And so there's a lot at stake here for people to do it well and at least understand enough to know how to set this up correctly.
Eric & Melissa Broughton
Absolutely.
Eric & Melissa Broughton
There's so much that changes on a regular basis. Every time we have a new presidency, every time we have a new congress, they always make changes to the tax code, and that trickles down to us tax preparers. If you don't keep up to date, then you may be missing out on some absolutely fantastic short term tax planning that just by itself saves several thousand dollars to you directly a year or generate tax credits. Some people overlook tax credits in this field, and I feel especially for people that may be listening to this now or watching this on YouTube, there are a lot of ways to generate tax credits, and tax credits are worth four or five to one. So the ROI is four to one on that at a baseline. If they're available to you, go for them. And on our website we have some information on certain types of tax credits. There's a lot of things that you can find out there, but once you start doing your research and gaining your Google or duck go education. Make sure you come back to a professional to put it all together for you so that you stay legal. Right? Because there's a lot of advice out there on how to do something, but they don't necessarily walk you through the steps on how to maintain a legal status for that. If you do get a knock on the door from your state board or.
Eric & Melissa Broughton
The federal government, I think the only thing that I would say is the piece really to keep in mind is that everybody's tax situation is so completely unique. I mean, you could have two people who are both w two earners standing next to each other and they're going to have two completely different tax situations. So my recommendation is, I would urge, and this isn't really a pitch, but I would urge you to reach out to us through our website and schedule a consultation. We won't call your tax preparer and say, hey, they're cheating on you. I promise the conversation doesn't hurt. So if anything, if you really are attached to your current tax preparer, it could give you some talking points so that you can have a conversation with them to see if you can get from them what it is you deserve. And if not, then we are, of course, happy to help and happy real estate agents.
Mike Swenson
Goals and your financial future?
Mike Swenson
You and cheer you on along the.
Mike Swenson
Yeah. And I think this year, for people listening, let's have this year be the year that you reach out. You talk to somebody new, you get a fresh opinion, and hopefully make sure that you're defending yourself in terms of what the past is, but then also be able to kind of put yourself on the offense in the future so that you can continue to grow. And so let's not bury our head in the sand here. Let's make sure that we're doing this well and you guys certainly can be the right people to help them. So how can they reach out to you? What's your website?
Eric & Melissa Broughton
Dizzybadvisor.com or I need bookkeeping.com.
Mike Swenson
A good vanity URL always goes a long way. Thank you so much, Eric and Melissa, for coming on and sharing. And, yeah, there's so much we can talk about and yeah, every situation is different. So if you're listening to this and you're like, I don't necessarily know what to do. I don't know how to set things up properly. Reach out to Melissa and Eric and they can help get you started along the way and hopefully get you on the path. So thank you so much for coming on. We appreciate it.
Eric & Melissa Broughton
Thank you so much. I hope some people out there find someone that they can talk to more than once a year.
Eric & Melissa Broughton
Yes, absolutely.
