Transcript
Speaker: Welcome back to the Tax News Now, a Becker Accounting podcast where we cut through the complexity and focus on what tax professionals, business owners, and advisors should actually be dealing with the rules. I'm Mark Iagos, tax partner at Portie Brown, and I've been looking forward to this conversation for some time.
Speaker: My guest today is Tony Nitti, partner at EY Private Tax, EY's national tax department. Tony leads the S-Corp team with particular focus on Section 1202, Qualified Small Business Stock.
Speaker: He works directly with business owners, CFOs, and corporate members on partnership and corporate tax matters. He's also a prolific writer and has been author of a number of articles out there and a number of leading publications.
Speaker: And that resume creates a fairly unusual combination. Tony is an expert in the S-Corp practice, but he's also become one of the profession's strongest voices on why C-Corporations deserve a more serious look.
Speaker: He could explain subchapter C, K, and S in ways that the average tax practitioner cannot. So, and I think that's one of his greatest achievements. So, Tony, welcome to the show. Mark, thanks for having me and thanks for that extremely kind introduction.
Speaker: um I want to start off by apologizing to you and to your viewers for the casual attire here today, but I had a couple of things working against me. You know, I live out in Colorado, but I spend five or six weeks with my family back in New Jersey where I grew up every summer ah near the beach and summer wrapped up or so I thought and we all went back to Colorado and then I had to immediately turn around and come back to New Jersey just because both my parents are dealing with some health challenges. And so a bunch of work attire did not make that return trip.
Speaker: And then the second thing you have working against here, Mark, is that as you can hear from my voice, or you'll probably be able to hear, I got hit with one of those summer colds.
Speaker: And so I waking up today, you know, I knew we had this scheduled, but boy, it just felt like it needed to be ah a casual day and a casual conversation. But I wanted to power through because like you, I also have been looking forward to this conversation for a while.
Speaker: Oh, no problem. And no, no apology. I think that's I like the summer look. I mean, the beach look is the way to go. i think we should all be doing it more. Right. So before we talk about, you know, you're what you're doing now Eden Y and before you became a pro prolific writer and all that, how did you find your way into accounting and let alone tax?
Speaker: Give us the background. Yeah, I mean, the truth is, right like i didn't I didn't grow up dreaming of one day setting up T accounts or interpreting the code and regulations. ah I kind of grew up without a whole lot of direction as far as what I wanted to be um when I reached you know adulthood.
Speaker: The only thing I can even remember, Mark, like thinking, I'd be kind of cool to do that was being a sports writer, you know, because I loved to read growing up and I love sports and I was reading, you long form sports writing that doesn't even exist anymore. But I thought that would be kind of a cool gig. But um it's not something I ever thought really thought about or pursued just because my I mean, the people I love to read were so talented. It's just it just seemed like an impossibility. And so um I entered college you know without a major and really with no particular direction, but just because I didn't know what I wanted to be when I grew up doesn't mean I didn't know some things about myself that would help me land on the right career for me. And and the one thing I knew and have always known
Speaker: is that like, I loved, I love the learning process, right? Like I loved diving into some area that was new to me and and seeing how much of it I could take in, how much of it I could absorb. And, you know, if I could kind of go through that process and leave with this expertise about something that, whether it was days, weeks, or months ago was brand new to me. And so um i knew that, that, that kind of persistent challenge that continuous growth it was going to have to be a hallmark of any career career i chose i just didn't know what that career should be and so i'm in college and i'm undecided as far as a major goes and then it hits me it's like boy i love to learn i love what college is throwing at me i'm taking these different classes in different areas and and um just kind of filling that bucket like i said of ah
Speaker: generating some degree of expertise in this wide variety of issues and so it hits me and i think it hits a lot of other people the same way where i'm like well hold on if i know i love to learn and love you know the educational world right now but i don't know what i want to do when it's over maybe i should just prolong this thing as long as possible and so i decided i would go to law school And it's funny, I remember this conversation like it was yesterday, but we were stretching out before soccer practice in college. And I told some of my teammates, like, yeah, I made the decision, right? I'm just going to go to law school i after college until I figure out what I want to do, because I'll just keep learning, right? Just keep learning until I figure it out.
Speaker: And one of my teammates said to me, he's like, if you want to get into a good law school, you shouldn't be a you know criminal justice major. He said, all the good law schools are looking for accounting majors.
Speaker: And he had a lot more direction in life than I did. so I just took it as gospel, Mark. Like I didn't independently vet it or anything like that. I just assumed he was right. And so pretty much just on his word, I went in and became an accounting major.
Speaker: And I'd love to tell you that like, you know, when I saw my first debit and credit, I picked up the phone and called my parents and said, you know, mom, dad, I'm home. I know what I want to do the rest of my life. But obviously it didn't work out that way, right? For a while, it was just,
Speaker: something I kind of viewed as a means to an end. Like I'm going to take these classes. I'm going to use it to get into a good law school. But I will admit that when I took that that federal income tax class that we take as undergrads, I was like, you know, this kind of matches what I'm looking for in terms of I know they're only showing us a tiny sliver of the income tax law, and it's really kicking my butt. Like this is really complicated stuff. And if it's just the sliver of it, I can't imagine how much opportunity for growth exists if you make your living in the broader tax law.
Speaker: But it's not to say i knew that's what direction I wanted to go. But what happened was, you know, my senior year comes around and I'm still planning on going to law school. I'm getting ready to take the LSATs.
Speaker: But, you know, all the the big four, it wasn't big four, big six back then, man. The big six firms came to campus to interview and the school would put pressure on you to go interview because people stop interviewing.
Speaker: You know, the firms are going to stop coming. And so I went and I interviewed and Arthur Anderson, who at that time was, you know, the biggest firm in the world, ah made me an offer. And it was just one of those things where I was like doing the math of what it was going to cost to go to law school versus what Arthur Anderson was offering to pay me as a 22-year-old kid. and I just thought, maybe I should just give this a go, right? Like try it. And if I don't like it law school is not going anywhere. And it's not like I was wedded to this idea of getting a JD necessarily. I just...
Speaker: was trying to continue this this educational process and and challenge myself intellectually. I'm like, well, maybe this job will do the trick. And so when I accepted the opportunity at and Anderson, and I don't even know firms do this anymore, but back then they certainly did. Like they they just look at you and say, okay, which way are you going? Audit or tax? Yeah.
Speaker: And um I didn't know a lot about what a career in audit would look like. But like I said, the only thing I knew for sure about myself is I just wanted that constant intellectual stimulation. The one thing I knew I would not be able to stomach was any career where whether it was six weeks or six months into it, you'd seen everything there was to see. And it was just kind of repeating the same process every day. And when you think about the tax law and the role it plays just in popular culture, right? Like everybody uses the tax law as this reference point for the incomprehensible, right? You know, things, it can't wrap, ah wrap their head around. And I think it was, you know, Einstein who once said the hardest thing to comprehend was the income tax. And so you're sitting there as a 22 year old kid. It's like, well,
Speaker: If it's giving Einstein troubles, it's going to do a number on me. And so if I'm looking to constantly be challenged and constantly have chances to grow, i'm going to go to the tax side. And I'll tell you, buddy, like for all the mistakes I've made in my life and my career, that's one thing I got right. You know, like I got right that that tax law would present a career where you never close the book at the end of the day and say, I understand it all now, right? I've got it all dialed away. I mean, almost to a depressing degree, dude, where it's like, I've been doing this for almost 30 years now. How is there still so much stuff that I'm not comfortable with? Like, it just doesn't seem possible. Yeah.
Speaker: You would just think that after 30 years of applying your trade in the code and regs, there wouldn't be a whole lot under the sun that you hadn't seen yet, but it's just not how any of this works. And so I definitely did get that piece right where this is in a career where if you love repeating that process of feeling overwhelmed by new information and then over time and with some hard work, feeling like you're at least garnering some type of mastery over the subject matter,
Speaker: Boy, it's just you're never you're never going to get bored trying to sort out the code and regs. Put it that way. Yeah. I mean, a lot of us enter tax or fall into it because we enjoy problem solving, providing solutions.
Speaker: but But there's usually another moment when it stops feeling merely like a job and more like a craft, right? And was there a particular engagement, technical issue, a situation where you kind of realize the light bulb goes off and says, I really want to be really good at this and I want to dive deeper in this that happened in your career?
Speaker: I just so people listening know, like we did not run, you know, ah a script by each other. Like we've known each other a long time. And this this is a great question. And it's one that I have an answer for. um It may disappoint you in a sense where happens.
Speaker: It came from a negative place, but led to some really positive changes. And I have talked about it before in presentations kind of about career path and stuff like that. But what it was, Mark, is when I when i started my career right at Anderson and then Anderson was wiped off the face of the earth two years after I started there by you know Enron and the scandal there. And eventually I landed at at at PwC.
Speaker: Like a lot of kids right out of school, man, I was just so focused on what do I need to do to get promoted? Like, how do I get to senior? How do I get to manager? Because people always tell you, particularly in in what's now the big four, you know, you can get manager on your resume. You can write your own ticket. You can go anywhere, do anything. And so all I was worried about was like, am I shaking the right hands in the office? Am I doing the right things as far as the time spent at my desk, cranking out returns? Like, am I just going to keep moving up this path of promotion?
Speaker: And that worked out okay. And four years into my career, i made manager at PwC. And you just asked, you know, was there this seminal moment where you knew what you wanted to be with your career?
Speaker: It was that day when I found out I was promoted to manager because I thought it was going to be, you know, this this big sense of accomplishment and this big, you know, life-changing day where it opens up all these doors.
Speaker: But what I've talked about around the industry before is when I went home that day, dude, it hit me like a brick wall where I realized like, wait a minute, I'm kind of a fraud. and I say that because i had been so focused on like getting things done and moving them through the process. And and as a senior, you know, reviewing returns and and moving along, I really hadn't bothered to learn a whole heck of a lot about how the law worked.
Speaker: You know what i mean? And I know people in the industry will understand what i'm saying. I spent so much time with the hows, like how to get the returns done, how to you know keep everybody happy. I hadn't spent a whole lot of time with the whys. Why am I doing what I'm doing, right? I'm just turning over last year's work papers and repeating the process and adding back accrued bonuses and one half of M&E, but never really stopped to ask why.
Speaker: And when I got promoted to manager, I realized like, wait a minute, What this means is that instead of having the world at my fingertips and the ability to go anywhere, like I'm kind of a prisoner here because with manager on my resume, anyone who wants to hire me, at least I thought, right, would have a a set of expectations about what I was capable of and what my skill, you know, um um you know,
Speaker: what my technical level was. And i knew I didn't have that technical level, right? I just, it hadn't been something I prioritized. And that was a terrifying feeling, right? It was a terrifying feeling to feel like i could probably get my way through an interview and land a job somewhere else if I wanted to move.
Speaker: But there's no way I felt like I knew what someone who was hiring a big four manager would have expected them to know about how the law actually works.
Speaker: And so I hated that feeling so much that I am. I applied to go back for master's in tax at University of Denver, like pretty much instantly. Cause I'm like, I got bridge this gap, man. I can't keep going through my career with this, this feeling that I have. And maybe the reality of the fact that it would be hard for me to ever go to another opportunity just because I, my, my skillset did not match my resume, put it that way.
Speaker: And so when you ask when the light bulb goes off and I know there's a long winded answer, when I took that first class in a graduate tax program. And my professor was a guy talk about a lot. Mark Vogel, he used to run the law school at University of Denver, just a brilliant, brilliant tax mind. And he's teaching the class and I'm sitting there and i'm watching this person. You have to understand like my first four years, as I said to you, they weren't,
Speaker: They weren't prioritizing substance, right? and I want to be able to wield the tax law. They were prioritizing keeping my bosses happy, making the underlings get things done on time so I look good. It was it was process.
Speaker: And all of a sudden, i'm watching a guy talk about the law with this deep understanding and citing case law off the top of his head from 60 years ago and private letter rulings to the last digit. And it was the first time in my career, right? Like I had met successful partners who made a lot of money and never once did I say like,
Speaker: That's what I want to be, right, when I grow up. But when I would watch um Mark do his thing and his grasp of the tax law, it was the first time where I said, I know what I'd like to be able to do. And what I wanted to be able to do was say, whatever ends up happening in this career I never want to have this feeling again that I have now of being a fraud, for lack of a better term.
Speaker: And the only way I can know I won't feel like a fraud is if I can have what this guy has, that substance, right? that That underlying knowledge of how the law works. And so it really was this dramatic inflection point.
Speaker: where I said, you know, that's my priority from now. i am not worried about rate of promotion. i am not worried about what they're offering to pay me. I am worried about when I look in the mirror at the end of the night, am I going to bed a little bit smarter than when I woke up in the morning in terms of understanding the law?
Speaker: And so, you know, a lot of that was spoon fed to me in the graduate tax program, but a lot of it had to come on my own and just saying like, I'm not doing the whole same as last year stuff anymore. if i'm If I'm adding back, you know, 50% of meals and entertainment, I want it to be because 274 tells me to, right? And if I'm adding back accrued bonuses, I want to understand the 461-4 regulations and and why I'm doing what I'm doing.
Speaker: And so that was it, man. And like I said, it it doesn't come from a great place that that feeling. And I know it's a feeling that people can identify with because I've i've talked about it before and people have come up to me after the presentation and said, man, that that feeling of being a fraud. i get it. I get it. I've been there and I don't want anybody to feel that way. And as we'll maybe talk about later, like maybe I shouldn't have felt that way. Maybe it wasn't fair to feel that way. But either way.
Speaker: it was enough for me to say, ah just want to know that if I'm going to make my living in the tax law, I have a thorough understanding at the core of what we do. I don't want my career to be predicated on having the one big client or having a relationship with one powerful partner because I've seen those situations and the partner retires or the client leaves and you've got nothing left, right? Like you don't have a whole lot left to offer your employer. And I just thought if I can have... a decent mastery of the tax law. And as we already said, it's never going to be mastery enough for you. You'll always feel like there's too much you don't know. But if I can have a decent mastery of the tax law, that should, you know my my employers should feel like they're getting a good return on any investment they make in me.
Speaker: So Tony, um I'm sure through, you know, as you as you come up through the system and you're learning and you're growing, there's probably mentors. There's probably people that, you know, kind of shaped not only your ability to understand tax code, but really how to be a professional. um And was there any, you know, besides having those mentors, a piece of advice maybe somebody gave you that at the time didn't make a lot of sense, but over time, you know, as you kind of, as years go by, you're like you start to look back it and go, well, that was more valuable than I than i realized back then.
Speaker: Yeah. I mean, it's, it's funny, Mark. I just, I could scour the three decades of my career looking for other names, but the truth is, in a couple of different ways, the the man I already mentioned, right Mark Vogel at University of Denver, um he's just changed everything for me. I mean, he just did. And there's there's more to the story, but like when I went back for that master's in tax,
Speaker: um I was going part-time, right? PWC was paying for my classes, but only one class per semester. and you You stretch that out, it's going to take you several years to get that that MST.
Speaker: And remember, I'm racing against the clock here where I feel like I need to bridge this gap between what I know and what I should know. And if it had taken several years to to fill that gap through the master's program, who knows where my career might have ended up, but Mark after my second class with him, i didn't even think he noticed me. You know, i I didn't think he knew me from any other student in the class, but he called me up one day at PW and said, look, it's clear that you care about learning this stuff, um but it's also clear that you're going part-time because your firm's paying for you to go one class a semester. And he's like, I just want you to know that
Speaker: you know, if you ever want to go back full time, I'll take care of you. You know, and being an Italian guy growing up in New Jersey, somebody says they're going to take care it It's not always a great connotation, but I'm like, what do you mean take care of me? And he's like, just come talk to me, right? We'll get you through the program as quickly as possible with limited financial hit. And that's, that's life changing, man. I mean, it really is like, it it And it then it did change my life. And then he would come back years later um after I had started doing some writing and really was the first person to say, you know, you're you're decent at this writing stuff. You have a ah pretty good ability to explain the law.
Speaker: You should be out there teaching and speaking on this stuff. And I was very resistant to that. um It's not something that that I'm comfortable with. It feels natural. But he gave me this opportunity.
Speaker: and what What Mark was doing at that point is, in addition to his work at the law school, you know, he would do continuing education and he would send four or five professors from the law school around the country to just do these eight hour annual updates. And just the fact that he even saw fit to include me in that group, right? Like I was giddy to just be able to sit at a table with these people who had been writing you know, the 453 regulations at the IRS 20 years earlier. Now I'm included and considered one of their peers.
Speaker: And, you know, it allowed me to kind of pay my dues and cut my chops as a presenter. But more importantly, like behind the scenes, every year for about five or six years there, I was teaching these eight hour updates, ah you know, maybe 15 times a year. And a couple of years go by and you start to realize that, wait a minute, because he's asked me to do this, there's really nothing that has happened from a federal income tax perspective in the last half decade that has kind of snuck through the cracks. You know what I mean? Just because you're he's tasking me with teaching this stuff and you realize that
Speaker: how much more you're learning about what's happening in the tax law than you otherwise would have. And so listen I've had a lot of great people I've worked with throughout my career. you know you know and You know the story of how I ended up at EY. I mean, Dave Kirk um was ah a role model and hero of mine, which is depressing as hell to say, because he's actually a year younger than me, which I do not like one bit. But, you know, Kirk occupies a very prestigious place ah in the way I view him and his impact on my career.
Speaker: But Mark Vogel at DU, I mean, twice he just kind of, for no reason, just when when maybe I didn't even necessarily believe in myself, said, you know, I think there's something here and I want to give you this opportunity. And so that's an easy answer.
Speaker: I love it. I love it. and And Tony, I know that, and you know this too, but tax professionals have to communicate with some level of confidence, especially we're talking to people in the firm or clients, whoever, right?
Speaker: But the best ones also understand where the tax law is unclear and where their own knowledge in that particular tax law comes to an end, right? And so there's a balance there. So- How do you sound confident without pretending the answer is more certain than it really is? You know, and balancing that like, hey, I don't know the answer versus, you know, just sounding like I have I've never heard this before concept.
Speaker: Yeah, it's a great question, Mark. I always throughout my career, I've been wary of those tax professionals who are extremely authoritative in their responses. Right.
Speaker: Who who um it's kind of like the umpire who there's a play at the plate, right? didn't really see it clean, but to make sure the 50,000 people in attendance think he saw it clean, he really comes up and rings up the, you know, the runner with an out call and he's kind of hoping maybe he could fool everybody. There's, there's times where, yeah, I see tax people and they're, they're, they're so resolute in the advice that they're given. And it's, man, there's some things in the law you can be resolute about, but so much of it is facts and circumstance specific, you know, so much of it, um,
Speaker: can can bend based on different nuances that you may not have even drilled into yet so I've always thought it was best practice and sometimes you know clients don't even necessarily want this but they end up appreciating it if you're working in an area where there maybe is a lot of gray area, like you said, and and I think we're going to probably talk about some QSBS stuff later, but it's a perfect example, right? With QSBS, there's clients who want answers that do not exist.
Speaker: And so what I will often do, and like I said, it might drive my clients nuts, but I'll give them the history lesson about the evolution of QSBS from 1993 to now and why there is no guidance, because yeah I want them to have confidence in the air. want them to understand that it's not that Tony doesn't know the answer, EY doesn't know the answer. It's that the answer doesn't exist, right? Nobody knows the answer. But to do that, I will often lay that groundwork.
Speaker: takes three or four minutes, but I'll take them through why no one cared about QSBS from August 10th of 1993 until really 2017 when the corporate rate dropped. And because no one cared about it, there was no judicial precedent coming out of the courts. you know There was no interpretive guidance being issued by the IRS so that they understand that, yeah, we're we're working in an area where I'm not going to pretend I have the answer because I know that I don't, but we'll work through it together. We'll craft a position that, you know, that, that, that we think is manageable for us.
Speaker: And so the best thing I think anybody can do is, you know, they have a nice balance of,
Speaker: confidence but being respectful of the fact that the law is extremely complicated and oftentimes he who speaks loudest speaks most incorrectly when it comes to the tax law. Like just take a step back.
Speaker: You know, explain to the client why there might be additional nuance to it. This is funny you're asking because it's something I'm going through right now on a fact pattern. But yeah, just explain that. Hey, it's not as much as you want it to be cut and dry. It's not. I'm going to help you work through it. But, you know, we have to compare your facts to 100 years of case law and see where it flushes out.
Speaker: And that brings us to something that has become central in your career throughout it. And that is, you didn't just merely learn tax and become an expert in it. You began writing about it, teaching it and making it understandable to other people.
Speaker: And I think those are different skills, right? So my question to you is, how did you first get into tax writing? And why did you get into tax writing? Oh, man. um That's probably going to take this call a little bit of a different direction, but nothing I haven't told people around the industry before, but it's the only appropriate answer.
Speaker: um i was, you know, I totally grew up wanting to write and I never was going to try my hand on it at it. You know what i mean? Like by the time I reached my early 30s, I knew that I was carving out this path in the tax loft.
Speaker: And then without getting into a lot of the detail, but you know, at 33, I was diagnosed, you know, with a brain aneurysm and and needed eight hours of surgery to save my life. And it was, you know, there was a moment obviously there with the diagnosis. There was certainly a moment when they were wheeling me in for the surgery where I just kind of assumed it was a death sentence. Um,
Speaker: Brain aneurysms usually don't end well. um I was extremely lucky. But the point is, not to sound cliche, when you come out the other side of something like that, you're like, man, why would I leave anything on the table that I'm curious about about myself? I mean, really, Mark, it was as simple as that. And the the timeline will back that up. Like I'd never published anything before.
Speaker: that would have been 2008. But when came that but when i came out of that process I just knew that hey I decided for myself that I wasn't a good writer and it's like shouldn't I just let other people decide that for me like shouldn't i at least try it and let someone else tell me like you don't have the chops to do this and so it really just came from that place of like I'm getting a second chance at life why you know and this this infiltrated far more than just my career but my personal life too like just things that i took on where i'm like i don't want to waste a second chance not finding out you know for myself about some of these things and so i think it was 2010 um when it had to be 2010 because that's when the watson case came out an s-corp self-employment tax case
Speaker: And i had been badgering the editor at Tax Advisor for months, pitching him on ideas. And I'd never published anything. I didn't know how any of this worked. And he would just keep telling me like, well, we covered that eight months ago. We covered that two years ago. We're going to be covering that in a couple of months. And basically just telling me like, don't have anything for you. And that Watson case came out.
Speaker: And within a couple hours of it coming out, i emailed him and said, look, there's this landmark S Corp reasonable comp case. Let me write about it. But more importantly, let me write about the um you know the the entire case history of S Corp reasonable comp and what we can learn from this. And and you know he said, yes. And then kind of like the dog that chases ah the the car or the deer and doesn't know what it's going to do with it when it actually catches it. It's like, he said, yes, now I got to write this thing.
Speaker: And so, you know, I wrote and I rewrote and I edited and I reedited. and i think I even sent it to Mark Vogel for his input, you know, because I trusted him so much. But long story short, um you know, it got it got published. It was, um you know, one of the big kind of feature articles that the tax advisor will run. One thing about my writing, um is I've never learned how to keep things brief.
Speaker: You know, like I violate all the the real rules of writing where it's like, from my perspective, it's like, why say anything in a hundred words if you can say it in a thousand? And I'd love to fix that one day, but it ain't coming. And so it was long article. It needed space in the magazine. And and my firm was was proud of me you know it's not like they didn't want me to do it but they certainly didn't want it to become a central part of my career right they needed me billing chargeable hours but they were proud that i got it published and then life just works in the weirdest ways man because That article, first thing I'd had ever published, um it ended up winning the tax advisors article the year award. and for my firm, it was just kind of like oh, maybe this kid's got some talent at this sort of thing.
Speaker: And so um they... allowed me to write another article that got published. And then what happened is a guy that we were just talking about offline, Mark Friedlich over at CCH, he saw some of my writing. He liked it. He offered my firm the opportunity for me to co-author a treatise on consolidated returns. which by the way is every bit as awful as it sounds. um But for my firm, like now they were going to get paid, you know what i mean? For my writing. So they're like, yeah, man, we can do this. Like six months of your life to write five chapters in this, in this treatise and we get paid for it. Like, yeah, that works. And so,
Speaker: it started to just kind of snowball. And Mark's another guy, know, I should have mentioned earlier, as far as a pivotal role, Mark Friedlich, I should say, in my career, because same thing, you know, saw an opportunity with the writing and then gave me an opportunity with the teachings, just become a great friend over the years.
Speaker: But, um you know, that was that's what was happening. I was writing all this technical stuff. But here's the thing, Mark, right? Like, when people say they want to be a writer, i don't know, I don't want to speak for everybody. But like, when I dreamt about it growing up i didn't mean i want to write these kind of and you know not to disparage technical writing but like this robotic formulaic you know what i mean sterile writing where every sentence has to have a citation like you know why because i've grown up reading all that stuff and if it
Speaker: you sometimes there's an article where you can understand it, but oftentimes you read a technical article you're like I'm just more confused than I was before. I wish somebody could explain it in English. And so when I say I wanted to be a writer, like I was always curious, like, could I make somebody want to read what I had just written? You know, like nobody's,
Speaker: cancel the rest of their day because a tax advisor article came out, you know, like, but you want to know, like, I don't know, can I, can i make somebody laugh? don't know. Can I, can I explain something in a way that actually helps them? And so I was begging my firm back then.
Speaker: This is when I was at Witham to let me kind of write informally on the firm's website. And they were, you know very forward thinking firms still are. And they gave me an opportunity to do that. And this is where the whole life is funny thing comes in because,
Speaker: look, man, we had the numbers in front of us, like maybe 500 people a month were reading the things that I wrote. So it wasn't like we were really gaining any traction. But one of the best things I can tell anybody out there about things like writing in the current environment or speaking is, man, it doesn't matter how many people are reading or are listening.
Speaker: It just matters if the right people are reading and listening. Because couple months after we launched that blog, ah Janet Novak, the editor at Forbes on the tax side just reached out to me one day and was like, I like your style. I like the way you explain stuff. Like, would your firm be willing to move its platform from the firm's website to this huge national platform? And as you can imagine, like my firm,
Speaker: Couldn't sign on fast enough because the exposure was just tremendous. But it's just, like I said, crazy how life works because I was just writing into the void. Nobody was reading it. And then all of a sudden overnight, um you know, if I write about the right thing, it could get read by a hundred thousand people. And it was just um crazy how that all unfolded. But that's, that's pretty much the story. And then from there, you know, just kept doing it all.
Speaker: I love it. I love it. And let's just say someone's listening to this and they're younger and they're thinking, hey, I want to get into writing or speaking, but do I need to be an expert first? What would you tell them?
Speaker: What I would tell them, buddy, is if you're waiting for the day you feel ready, it ain't coming. You know, it's just not because, um, It's such an intimidating career, and at least from my experience, and maybe not everyone suffers as much as I did with some or do with some imposter syndrome, but like if you're like, I shouldn't write about Topic X because I think there's so many more people so many people that know more about Topic X than me that I'll be exposed There's never going to be that day where you really truly do believe you know more about topic X than everybody else. And so you're just going to keep pushing it and kicking the can down the road and and saying it's not the right time for me.
Speaker: And so what I've encouraged people to do is just manageable chunks, right? Find an area the law. where you do feel like you can garner some degree of mastery. Maybe it's because it's new law, right? It's 199 cap A. It's only been around for for you know eight years, or maybe it's an area law that's not new, but just doesn't have a lot of of precedent behind it, like QSPS, right? But just take something that's manageable.
Speaker: and dive in and read everything you can get your hands on and then give it a shot, right? Like, I mean, whether it's for your firm's website, whether it's, you know, you reach out to, like I did, you know, the tax advisor, or there's so many ways to get published these days, but You got to let someone else tell you you're not good enough, right? You can't decide for yourself you're not good enough. Like you got to put this stuff in front of someone else and let them decide to ah publish it.
Speaker: But find something manageable, dive in, learn as much as you can. And then the hardest part is belief, right? Believe when you learn as much as you can, that you know as much as anybody that's going to be reading.
Speaker: and just go with it because otherwise there's just never going to be that day where you go, I think I'm as comfortable with qualified opportunity funds as anybody else. So I'm the authority on it and I should publish on It's just not coming. It's not how this industry works. And so, yeah, the best advice is at some point you got to just jump in the deep end of the pool with both feet, you know?
Speaker: ah love that. That's great advice. Well, we've spent the first half talking about how you built your career, what got you into it, some of the, you know, more nuances of writing and and just some of the, you know, your vulnerability. And I appreciate that, ah you know, to give people advice.
Speaker: But the central idea um that we've seen is you know this idea that entity selection should not be treated as a one-time formation decision, which we see all the time out there.
Speaker: um And it has to be evaluated from the entire lifecycle the business, from startup to growth, capital raising, the whole thing. I think there's a connection between, you know, what we just talked about and getting more into the technical side.
Speaker: So kind of let begin with a broad question. Obviously, last year, little over a year ago, we had the OB3, HR1, One Big Beautiful Bill Act that's passed. How did that change choice of entity conversation?
Speaker: And where is this taking us in the industry? good question. um I don't know that I would say it it changed it. What it did was solidify the inputs for the first time since 2018, right? What do I mean by that?
Speaker: um When you talk about choice of entity, and and I guess maybe before we get into specifics, what troubles me about choice of entity is exactly what you just said. Choosing your entity for for one moment in the life cycle and not and And it's not a client's fault. They need to be advised of these other moments in the life cycle where the entity choice is going to make a big difference. But what often happens to me in my role in national tax is I'll get pulled in for a client that's at some right seminal moment in their life cycle as ah as a business owner.
Speaker: And i have to explain the consequences to them of that moment. It's not what they want to hear. And they'll say, well, I thought the consequences were this. And I'll have to say, well, if you had been an LLC, it would have been this, but you're an S-corp.
Speaker: Or if you had been S-corp, it would have been this, but you're a C-corp, right? Like your choice of entity matters here and it's affecting this big moment. And they'll they'll respond with a familiar refrain, right? They'll say, I wish somebody had told me that. Then what you're telling me now. And so I think any choice of entity conversation really does need to focus around the client being informed of all the key moments along the life cycle, anything that might come down in the future. Hey, do they want to issue an ownership interest to an employee, right? Tax-free. Okay, right. That's going to change things. Do we plan on taking a lot of debt and we're going want basis? Like that's going to change things and letting them go in eyes wide open.
Speaker: Because you you don't want that. You don't want a client saying, why didn't you tell me this when I set up my entity? And so going back to your question, from 1986, man, until 2017, it was basically, right, it just two options. You're going an S-Corp or you're going to partnership, right? C-Corps were the entity choice of last resort. And understandably so. You've got double taxation and that first corporate level tax was a hefty 35%.
Speaker: And so C-Corps didn't really have and maybe didn't really deserve a seat at the table. Now, interestingly, you know, we know that for decades now, the most common type of return filed is an 1120S.
Speaker: I have a problem with that. Like, I don't think that's justified. And I say that as, you know, the S-Corp guy at EY. But I don't think that that's always the right answer. We can get into some more of that later if you want. But then we get to 2017 and TCJA comes in and they do a couple of things, right? Number one, they drop that corporate rate from 35% to 21%. That's huge.
Speaker: The individual rate that applies to pass-through businesses, yeah, it drops down from 39.6 to 37. But then the real thing they throw to try to balance it all out is 199 cap A and the 20% deduction. And so they're saying, hey if we're going to cut this corporate rate from 35 to 21,
Speaker: we got to throw a bone to the pastor businesses. We'll give them this 20% deduction that effectively reduces their top rate on income from 37% to 29.6%. But you know, and I know the rub of 199A is not everybody benefits from it, right? Whether it's you're in the wrong type of business or you're, um you don't have the wages to support it. And so all of a sudden, you know, the calendar turns to 2018 and you're like, Hey, I'm a,
Speaker: Pestered business that maybe doesn't fully benefit from 199 Cafe, maybe I'm paying tax at 37%. You're telling me as a C Corp, I can pay an entity level tax of 21%? Like that's pretty good. And it's even better when you don't need or plan to send a ton of money out to the owners? Because yes, there's going to be a second 23.8% dividend tax for a shareholder in C Corp when the money comes out, but maybe that business is looking to expand. Maybe it's looking to dump all that money right back into the business. And the crux, or that's not the right word, the rub, I should say,
Speaker: of being an S-Corp or partnership is, yeah, right, maybe you get one level of tax, but you're going to pay that level of tax whether you take the cash out or not. So imagine being an S-Corp or a partnership that wants to reinvest the the earnings into the business, and at the individual level, you're paying a rate of 37%, whereas your C-Corporation brethren are paying 21%.
Speaker: And so right away after GCJA, we saw that C-Corps deserved a seat at the table and they got one. Now we haven't layered on top the the second part of the one-two punch that favors C-Corps, which is the potential ability to exclude gain upon exit under section 1202, the qualified small bo ah small business stock rules.
Speaker: But we had tons of businesses that said, I want to kick the tires on this. Maybe the grass isn't greener as a flow through anymore. But what made it challenging, mark to do these longer term projections to decide if it was worth it to to bail on being an LLC or an S Corp and become a C Corp is the inputs that weren't permanent. And what I mean by that is while the TCJA added 199 CAFE, while they dropped the individual rate from 39.6 to 37, those were temporary changes. And they were all going to expire at the end of 2025. And that made planning so difficult because imagine you're thinking about flipping to a C corporation as a partnership or an S corp, but you're not certain, maybe you're benefiting from 199 CAFE.
Speaker: If 199 CAFE goes away and my rate overnight jumps from 29.6 to 39.6, yeah, I'm going to wish I was a C corporation. But if 199 CAFE gets extended, then maybe I'm happier as an S corporate partnership paying 29.6%. And so it was such a tricky time to project out. You would need these assumptions that could toggle on or off.
Speaker: the inputs of what do we think the rate's going to be in 2026? What do we think 199A is going to look like in 2026? And so the beautiful thing about the reconciliation bill, I don't think it really moved the needle dramatically one way or the other on what the right entity choice is, is it now allows us to look at the inputs with some degree of permanence, right? Like we know 37% is here to stay. 199 cap is here to stay.
Speaker: Now, to call any tax law permanent, right, is ah is a fool's errand, obviously, because um it's only as permanent as as congressional control, because like the TCJA, the reconciliation bill was purely ah ah a Republican bill done via the reconciliation process. So if the balance of power were to swing back, everything could get upended. But at least for as things stand right now, we don't have this timer ticking down on when rates are going to expire and when 199A is going to expire. and so You know, the the reconciliation bill itself, and I know I'm giving you seven-minute answer to an eight-second question, but like, you know, it it expanded QSPS dramatically, which swings the pendulum in favor of being a C-corp. But it also, as I said, made permanent 37% top individual rate, made permanent 199 cap a which swings it also, you know, back towards being a pastor entity. But
Speaker: The best thing now is we have all the information we need to sit down with clients, project out tax rates, you know, for a new venture, for a, you know, a conversion midstream. Like we have the ability to know what the law is going to look like and say, does this make sense in your situation to revoke your S, to incorporate your partnership, um you know, to to make an S selection if you're a C. Like it's just nice to not be guessing anymore on the inputs.
Speaker: Well, no, I think you you brought up something before I thought that was very interesting, and that is when you're looking at choice of entity, it is a fluid conversation, not just, hey, I'm setting up a new company.
Speaker: what should I be, right? at At different times throughout the life cycle, it may be time to change it or at least evaluate it And I think, like you mentioned, C-Corps definitely with um with the TCGA and the drop in the corporate tax rate and now with OB3, I think C-Corps have definitely have a seat at the table, especially when we're talking to our clients about exit strategies or even just planning for that besides just the current tax.
Speaker: And this is where 1202 comes into play. And I think for years, a lot of tax practitioners have treated QSBS as something that's, you know, startups, you know, technology companies, venture capital, Silicon Valley founders. And it's kind of been just a narrow gap that people just kind of ignored. Right.
Speaker: um So let's talk about 1202 QSBS. Kind of give us an idea. What is it? And what is the exclusion that in in an in the best high level view you can explain?
Speaker: Man, I mean, when I do it, I sound like one of those late night TV infomercial pitchmen, right? But the truth is, it it is. It's one of the most powerful and unique provisions in the Internal Revenue Code because we're not talking about deferral here, right? We're talking about exclusion. Deferrals are fairly, you know... um they They can be found fairly frequently around the tax law. Exclusions are rare. And 1202 says, look, a non-corporate shareholder can exclude from their federal taxable income up to 100% of the gain from the sale of this qualified small business stock.
Speaker: What makes it complicated from there, Mark, is we live in these two distinct regimes depending on when the stock was issued, before or after the the reconciliation bill. But like for the current climate, for stock issued today,
Speaker: You're talking about 100% exclusion after five years, right? 50% after three, 75% after four, but the the real carrot you're chasing is 100% after five years. And that exclusion is meaningful. It's the greater of, right, $15 million dollars or 10 times your investment in the stock. And so, as I said, you're not talking about deferral that's going to come home to roost at some point. like it would, for example, with the, you know, an opportunity zone that you were never talking about earlier. Like here, you're talking about selling your company, pocketing $15 million dollars of gain tax-free. That's $3.5 million dollars in federal tax savings and retiring to a beach somewhere, you know, knowing that uncle Sam's never going to come knocking for that tax. And so, um,
Speaker: it is an extremely valuable provision and it does it's strictly the domain of the c corporation so when we think about choice of entity you're not getting 1202 as an s or a partnership and so you know i was in a call about a week ago and it was a dual choice of entities slash qsbs call and they incorporated the the choice of entity piece kind of late in the game and i i sent a message to one of my teammates there on teams and just said if If we're talking about QSBS, there's no choice of entity conversation to be had. We're going to have to have a C-Corp in this structure somewhere. um
Speaker: But the challenge I think we have as an industry is that it lived in the shadows from 93 until 2017. It started to emerge from the shadows when the corporate rate dropped. Now it's everywhere, everywhere. Because after the reconciliation bill, big article in the Wall Street Journal, big article in the New York Times,
Speaker: Clients know about it. Everybody's talking about it. And so that puts pressure on us as an industry because we need to understand, and this is a conversation at this point in my career I'm having pretty much daily. We need to understand how much goes into determining if stock is QSBS, right? Like I just kind of gave QSBS as a throwaway in that introduction. Oh, you know,
Speaker: gain from the sale QSBS, you can exclude it. But the magic is what is QSBS? there's so much that goes into it. And, you know, there's tests that have to be met on the day stock is issued that I think people are getting more comfortable with. There's tests that have to be met throughout the entirety of your holding period, which I know we're slower to get comfortable with. There's redemption rules that act as a trap for the unwary. There's utilization of cash that can undo a lot of years of of good planning.
Speaker: And so we're just in this situation where the clients are going to read about it and oversimplify it generally by saying like, hey, man, I'm in ah a tech business and it's a C corp and I held a stock for more than five years. I'm good to go. Right. And we need to understand Did it start life as a C-Corp? Did it convert midstream? Was there a problem with what used to be a 50 million test that's now a $75 million dollars test? Was there some redemption that caused your stock to not be QSBS? Was there some disqualifying investment like we need as an industry to get into the weeds and sort through what it truly means to be QSBS? um
Speaker: Because, you know, like I said, all those... <unk> These aren't optional tests. All the T's got to be crossed. All the I's got to be dotted. And um I always believe that when you're talking about it exclusion rather than deferral, because exclusions we know are intended to be interpreted narrowly, um we should you know expect scrutiny when you're excluding $10 million dollars or $12 million dollars of gain. And so we should make sure we have everything buttoned up.
Speaker: Yeah, and I think, I mean, 1202 is great and you know everyone focuses and hones in on the you know the exclusion and the great benefits from that.
Speaker: And one of the traps, and you mentioned it was the original issuance and why it's so important. Can you can just give us – I think that's an area that people have gotten a little clearer on, but it's still kind of missed in the conversation quite a bit.
Speaker: It is, right? The whole point of QSPS back 93 was to incentivize people to invest right directly into corporations by infusing either cash or services or property. They didn't want to incentivize me to go out and buy Mark shares in a corporation, right? That's what they wanted. They wanted money going into a C corporation in a post-General Utilities 1986 world.
Speaker: um where seed corps were finding it hard you know to exist because as I said earlier, corps were the entity choice of last resort. And so What they want for stock to ever have a prayer to be QSPS is for that stock to be acquired, you as you said, at original issuance directly from the corporation, exchange for cash services or property.
Speaker: They don't allow for me to go out and buy Mark shares. And I was dealing with a situation several months ago now where we got into an engagement a little bit.
Speaker: And in that engagement, we realized like, hey, sorry, but when we look at these deal docs, like this fund that we're talking about, it acquired all of these shares on the secondary market, right? Like it did a purchase of these shares. And that's that's a killer. It's not QSBS. Like it just doesn't work that way. Or the trap for the unwary that stings far too often is people that own QSBS or what they believe to be QSBS individually and they get compelled to drop that investment into like a family limited partnership and think, what what can the harm be?
Speaker: the harm is that partnership did not acquire that stock at original issuance. It acquired it via partnership partner contribution under 721. So it fails the original issuance requirement. And so, um,
Speaker: So what the original issuance requirement allows for and doesn't allow for, and then maybe more importantly, understanding that if you believe you hold QSBS, for the love of God, right, don't don't move it to anyone else unless someone that works in the space blesses that you can do it, um because you'd hate to have stock that was potentially, the gain from which was potentially excludable, and then you undo that by dropping it into a family-loon partnership.
Speaker: So Tony, here's a practical problem. um Section 1202 generally rewards gain from the sale of qualifying stock, as we've talked about. But a lot of private company buyers often prefer to purchase the assets, as we know.
Speaker: So how should this probability of an asset sale reduce the value assigned to a potential QSBS benefit? And, you know when we think about, you know, S-Corps out there and partnerships and even C-Corps, when should we be really talking to our clients about this and trying to figure out, you know, how 1202 should be structured for future sales, especially if they're asset sales?
Speaker: Yeah, they're probably independent issues here, Mark, between like just an asset sale that's um most the most likely outcome in general and then separately kind of talking about maybe converting an LLC or an S-Corp midstream to a C-corporation. If we just think about in general people saying, you know, everyone's excited about QSPS, but buyers always want to buy assets. It's like, yeah, they do, right? But I was mentioning to you before the call, QSBS has really started to creep into my diligence work on the buy side because sellers are saying, look, I believe what I hold is QSBS. I'm not listening to anything that doesn't involve a stock sale. Or if it's going to be an asset sale, you better gross me up ah to account for the fact that I'm leaving this exclusion on the table.
Speaker: and ah You know, it's it's one of those things where if it were if it were always the case that buyers are going to buy assets, yeah, QSPS wouldn't quite be ah as popular as it is. But there are certainly deals where um stock ends up being what gets sold for a variety of reasons.
Speaker: and there's always a way to come to the table and make things work. Now, even if you have to sell assets, all is not lost, right? I mean, yeah, you can't use 1202 to shield the gain from the asset sale at the corporate level, but there's potential to use the exclusion to exclude that second level of gain that arises under 331 at the shareholder level when there's you know a liquidation of the proceeds. So it's not you know it's not as ideal as simply selling the stock and and and availing yourself of the full exclusion. But It's a negotiating point like anything else.
Speaker: You know, when we think about converting an existing LLC or an S-corp to a C-corp and then being patient, you know, for three to five years to take advantage of the exclusion, that's kind of a different animal because anytime you're converting,
Speaker: ah either a partnership to a C Corp or with an S Corp, you can't simply do a revocation of the S election because if that stock was issued while it was an S Corp, it's forever tainted. So you have to get more creative. You have to drop the assets down into ah a lower tier C Corp, for example. So whether you're converting an LLC or converting an S Corp into a QSBS eligible entity, there's going to be this deemed contribution of the assets of the business into a corp in exchange for stock.
Speaker: And when we think about a deemed contribution of assets, The QSBS rules are designed to make sure that you never exclude appreciation that happened before you were in corporate form.
Speaker: So by way of example, if I have an LLC with a million dollars of basis in the assets and the $10 million dollars value of those assets, Right. Those assets have appreciated by nine million dollars in LLC form. If I now flip it to a C corporation, I need to respect the fact that when I eventually sell, yeah, I might be able to use QSPS and the exclusion therein. But the first nine million dollars of gain is going to be recognized. It cannot be excluded under 1202 because it happened before we were in corporate solution.
Speaker: And so when people are talking about flipping midstream, i always just kind of stress like they only do this if you think whatever value um you've earned at this point within the company, tangible or intangible, if only if it's just the beginning, right? Only if this thing is going to go to the moon because you're giving up the ability to exclude whatever value already exists. So we want the value post-conversion to be significant enough, the increase in value to be significant enough that you know, going through this, converting to a corporation, waiting out the QSPS period and all the requirements ends up being worth it.
Speaker: But maybe the best advice I give LLCs and S-Corps when they want to convert to a C to take advantage of QSPS is I just say, look at QSPS as the cherry on top of the sundae, right? like If you're going it gave you end up getting it, great. But if you don't get it, you want to still be happy as a C-corporation. So if you're only making this switch for QSPS reasons and you'll be miserable if you can't get QSPS because you've operated as a C-corp for the last five years, maybe this isn't right for you. But if you're going to flip to a C-corp anyway, if you think the grass is greener, then absolutely we should try to structure in for some QSPS benefits.
Speaker: Yeah. And I, and I think there's a lot of attention to C-Corps and QSBS and, you know, just a real quickly, you know, in the S-Corp and LLC partnership world, you know, it's still, you know depending on which entity, when you look at just the flow through treatment of S-Corp and partnership, where do you default when you're trying to, someone saying, Hey, what should I be an S-Corp or a partnership? Do you have a go-to, or do you just kind of look at the facts and circumstances?
Speaker: I always look, like I said before, at all the facts and circumstances, try to understand what moments in the life cycle might be coming that maybe the client doesn't even anticipate. You know, little things, like I said before, like you ever going to want to issue an ownership interest to employees on a tax-free basis? Because good luck doing that in corporate form, right? You're going to need to be an LLC issue a profits interest. You plan on taking on a bunch of debt and generating some losses? Like,
Speaker: Boy, having that debt included in your basis as an LLC is pretty nice. But where I always come out and err on the side of, Mark, is like something you touched on earlier.
Speaker: It's not always whatever I choose today as my entity is going to be the way I remain throughout the the the life of my company. Like sometimes you might want to flip a switch midstream. And I think what people really need to be taking into consideration more than they do is just the fact that the tax law does not treat you equally in both directions. And what I mean by that is it's easy.
Speaker: I shouldn't say easy, right? It can be easy to go from an LLC to either a C-Corp or an S-Corp tax-free, right? Like that's generally not a taxable event unless you have a 357C issue. And so you don't like life as an LLC. rather be in corporate solution. It's not that difficult to get there under the check the box regs, right? It can be very, very painless. But man,
Speaker: you're not going from C-Corp to S-Corp pain-free, right? Because to go, I mean, sorry, you're not going from C-Corp or S-Corp to LLC. You're not going pain-free because to get out of corporate solution and into a partnership for federal tax purposes requires at the very least a deemed liquidation of the corporation, which means you're triggering all the appreciation inherent in the assets, tangible and intangible. And so,
Speaker: If you're looking at this analysis of s versus, you know, LLC, for example, is the question you asked, I, you know, it blows my mind that there's still so many more S's than there are LLC's just because you go S, you're more or less locked into that, right? You can obviously revoke the S and become a C, but you're not, if you generate any value at all, you're not going to be able to flip to an LLC without, um,
Speaker: without incurring some tax pain. But if you start life as an LLC, you don't like it, you wanna chase after the self-employment tax play inside an S corporation, you can always flip over. But um that to me is a factor that I think more people should take into consideration is that you can go one way easy from LLC to corporation. You cannot go the reverse way easy. And so if you're not certain where things are shaking out in your analysis, why wouldn't you opt for the entity choice that gives you more flexibility moving forward?
Speaker: Yeah, no, I agree with you. And I think, you know, i have these conversations. It's every it's every week in multiple times with various people. And that is I say, hey, look, the beauty of the tax world is it we have the ability to switch anybody to any structure, any time.
Speaker: With that being said, it sometimes comes with some dirty consequences that are nasty and we need to be aware of them. The thing that I get is I get a lot of people said, hey, i I love when they come to us and say, hey, I want to set up a ah structure and then get our opinion and we'll push back.
Speaker: But when you talk to them, they're like, well, they should be an S Corp. you're like, well, why should you be an S Corp? Have you thought about an LLC? And they're like, I don't know, talk to my lawyer and and talk to their lawyer. And they're like, well, I just set up S Corp. So I'm not a fan of LLCs. And it's like, well, they're not even thinking about what, te you know, what are they doing? They don't know their business. And it it is interesting. So, you know, it's like to me, it's like have the right advisors around you, you know. Well, let's let's be honest. There's one reason there's more S-corp returns filed than any other type. And it's the notion, and I say notion because sometimes it's it's material, sometimes maybe not so material, the notion that you can save on self-employment taxes because of Rev Rule 59-221, right? Like your flow through income is not subject to payroll taxes. So you pay yourself a salary, you try to manage that salary, and everything you take out above that is a tax-free distribution that's not subject
Speaker: ah to payroll taxes. And that's great, right? When it works, but like, are the payroll tax savings better than, like I said, as an LLC, having the ability to give a tax-free profits interest to a long time employee, are they better than getting basis in debt under section 752 as a partnership? So you can utilize more losses or take out more distributions tax-free the payroll tax savings better than you know, having the concept of section 754 in an LLC context where someone that buys in or if someone passes away, you're going to get a step up in the basis of the underlying assets. Like,
Speaker: I don't know. To me, when you weigh all that against the payroll tax savings, while those payroll tax savings can be significant, they also come with quite a bit of scrutiny, right? From the IRS, from a reasonable comp perspective. So I don't know.
Speaker: Look, there's no one size fits all. It takes analysis, but boy, there's flexibility in an LLC structure that I always say about S-Corps, they're simple creatures, but they're rigid creatures, right? The reason they're simple is because they're rigid. And sometimes we don't want rigid creatures, right? We want to have flexibility. So.
Speaker: That's coming from an S-Corp guy, too. I hear you. I hear you. I have the same conversation with our friend, Brian Lovett, you know, he's very detailed in the partnership world. And I always say, you know, the partnership is is a very, very complex entity when you start to break it down deeper into it.
Speaker: to all the provisions, right? so And that should factor in too, man. Whenever I do a choice of entity analysis, I put one of those factors on the table of just, hey, how much do you as a client want to understand about what's going on?
Speaker: Because if you want to understand how you and your other 50% investor shake out, S-Corps are going to be pretty darn clean, right? With partnerships, if you end up with special allocations, you end up with you know, so reverse 704C locations, you might look at a K1 and go, this makes no sense to me. Why is my capital account this, but this other investor who owns the same percent is that. And it's just harder to understand what you're looking at as a client when you're dealing with sub K instead of sub S.
Speaker: And as a practitioner, it's harder to explain to a client how sub K works. I mean, i always joke, but there's a reason I make my living in in sub S, right? And let guys like love it do sub K because sub K is a whole lot harder. And that does matter. You know, it does play into choice of entity. Now, again, some people, um,
Speaker: some clients won't be disarrated by that they don't mind a little complexity or having to understand but other clients just say i want to understand where all the investors stand at any point in time and and relative to each other and s-corps they are beautiful creatures in the sense that they are simple yep well as we wrap up um i want to go through a quick lightning round with you these are just short answers gut reactions no lengthy footnotes you know whatever you decide um So just ask the question and you give me whatever comes to head. So C-Corps, S-Corps, or partnership, which one is most frequently misunderstood?
Speaker: In the current climate, S-Corps. Yeah, S-Corps. And just because, like I said, they're viewed as the default setting and the best source for small businesses, I don't know that that's the case in a lot of situations. I think LLCs are more nimble.
Speaker: What is the most overrated entity selection factor in your opinion?
Speaker: The most overrated? That is a lovely question. um Let me think about that. It's probably the ability to utilize losses based on basis, like um with with partnerships giving you debt basis. And I only say that because even if you have debt basis in a partnership, that's a temporary reprieve because then you have to contend with 465 and at-risk rules. And oftentimes, You know, the basis that you're getting out of a partnership is non-recourse. And so you survive the 704D rules and you have basis, but then you move on to 465 and you don't have enough at risk, so the loss gets hung up anyway. And so I think that really depends on the nature of the partnership and whether that liability that you're so excited will give you basis will actually give you at-risk basis.
Speaker: Love it. ah Tax provision practice practitioners should better understand. Pick one of them. Section 199 CAPA, 1202, or twelve ah two or seven oh four c I think 704C would be the hardest one for everyone to understand. I think 199CAPE is the one we're doing the best job understanding. And I think if you really want to provide value in the current climate, the more you can learn about QSBS, the better, right? Because you're talking about the seminal moment a client's life cycle. They're exiting their investment. They're cashing out. Man, if you can find a way to make that cash out, be tax-free, you're going to have a friend for life. But there's a lot that goes into it. And so...
Speaker: I think going back to something you and I have talked about offline here, the more you understand about QSBS, it's kind of like the more you understand about opportunity zones, you can identify pretty quickly just in a conversation whether there's something there, whether there's a possibility of QSBS. And I think, yeah, having that understanding so you can explain to a client pretty quickly, like,
Speaker: Hey, yeah unfortunately, there's no QSPS here, either because you bought the stock in a secondary or you're in a disqualifying business or whatever it may be, rather than get everybody really excited and selling engagement and start peeling back layers only to realize like now there's nothing here after we've spent all this time kind of getting a client worked up and we're onboarding a new client. And so if you can understand enough about QSPS to really attack those gating issues up front, I think it makes the relationship better for everybody.
Speaker: Writing or speaking? Oh, what's the more the more effective way of communicating an idea is 100% speaking. But that's the only reason I speak. What am I more comfortable doing?
Speaker: i mean, that's writing all day, every day, right? I mean, speaking... some people are comfortable with it some people it's natural for for me it's never been that way um you know i'm an introvert like i said by nature it's it's it's not something i embrace but you can't deny the fact that if you have a complicated concept that you want someone understand speaking is the way to go right like if i write a lengthy article about you know, 752 about debt liability allocation out of a partnership.
Speaker: What are you hoping for? You're hoping that somebody sits down, opens up your article, reads it beginning to end, has no follow-up questions, understands everything, you know, without any assistance. That's hard, man. But if you you talk about it, you teach about it, people can raise their hands and ask questions, right? People, you can so look around the room and see that maybe there's some confusion setting in and you can come at that same issue just presented from a different angle. You know, you can just,
Speaker: you can be nimble on your feet and try to help people understand. And so as much as I really prefer writing for my own sanity sake over speaking, if if the goal is not about preserving your sanity, if the goal is about helping the people on the other end, mean, speaking is always going to win out.
Speaker: And last one, take time with this. What is the one piece of advice you would offer to people in the industry?
Speaker: Um, that's something I've actually been thinking about a lot lately. Um, and it's one of those situations where it's almost like, Mark, I feel like I owe an apology to people around the industry. Cause know, I've given these presentations over the years about like having a a successful career and I've I've hit on the cliches, right? i And they're very real and they're very, you know, i don't I don't think that I was wrong about it, and but I'll talk about, you know, investing in yourself, putting in that extra time to learn something or, you know, leaving no stone unturned. And and like we talked about earlier, try and writing, even though there was no reason to try writing at that point in my life. Like I talked about those things and don't get me wrong, like I said, they are, I think, critical ingredients to a career, a successful career.
Speaker: But I think the one piece of advice I've never actually given in any of those presentations and any of those articles is because i think maybe I'm a little embarrassed about how bad I've been at it throughout my career.
Speaker: And so I shy away from it. But that advice would just be like, man, believe in yourself, right? Like believe in yourself. And when when I say I feel like I should apologize, it's because in some of the presentations, and I kind of did it earlier today with you, I almost talk about imposter syndrome as if it was a good thing in my career, right? As if, you know, if it fueled um this motivation to to learn more and to grow. And, you know, in that situation I gave you where I felt like a fraud after four years,
Speaker: Yeah, I think maybe at that point I needed a kick in the butt to to kind of put me on the right path. So when i when I talk more about believing in yourself, it's less about like those big picture, you know, it's my career on the right path moments and more of just like a day to day, like, hey,
Speaker: Do I know this stuff? Am I good enough? When I go into this conference call, when I go into this meeting, do I understand what I'm doing enough? Am I ready to try writing an article? Am I ready to give this presentation?
Speaker: i it You know, to do as I say, not as I do situation, because I've never been good at it. But... you know, just believe in yourself because what I've learned over the years is if you, if you don't like all of the external, um, you know, accolades you get or promotions you get, whatever, it's never going to fill that hole. you know what I mean? Like if you don't believe everyone else believing in and you, ain't going to matter one bit, right? Like you have to believe. And,
Speaker: I see so many people around our industry struggle with that. You know, and they they probably connect more with that imposter syndrome part of my career path than anything else. And it's like, man, I just wish I could take that away from myself, from everyone else and just tell people like, I don't know how you go about doing it, but just just trust it in yourself. Trust that you've put in the work and you deserve the good things that come your way. Because otherwise...
Speaker: Using imposter syndrome to fuel your fire, to you know it may lead to a successful career, but I'm not sure it's the best recipe for ah happy existence. Does that make sense? Yes. you know Going back really quick, right I know you said lightning round, but as I joked before, I'm not capable of doing anything quickly. But like think about what I was telling you before when I started writing and writing.
Speaker: overnight went from this audience of you know 500 people a month to 100 000 people in an article like when you have that doubt when when you don't when you when you're cursed with that imposter syndrome that should have been like wonderful moment in my career right i mean i should have been like hey i've arrived i'm so grateful for this like pat myself on the back but when you're filled with that self-doubt and all of a sudden you know 100 000 people are reading your articles you're like I don't deserve this. Like I'm not a good enough writer. I've never been trained in writing. Like it's just this nerve wracking situation where instead of taking joy out of the fact that life and your career have smiled on you a little bit, it just becomes stressful. Like, you know, I, I, got I gotta, gotta do more. I gotta write more. I gotta, you know, you, you may have noticed when I was writing like, um,
Speaker: kind of my, my niche was new legislation could pass at 11 o'clock at night and I'd have a 12,000 word summary up at five in the morning. And i I did that stuff, not because I was passionate about staying up through the night to, uh, to write about new legislation, but because I felt like, Hey, if I'm not a talented writer, I should be fast, right? I should be first to publish. And so that's why i would, I would kind of you know, turn myself inside out to get these things done. And it just, the whole experience would have been different if I were someone that's not, that doesn't deal with imposter syndrome and could have just said, this is amazing that people are actually reading my writing and whether I think it's good or not, or whether I'm comfortable, it doesn't matter. Like if other people like it, that should be all that matters.
Speaker: And um this goes way beyond career, right? It's whether people struggle with that in in their athletic pursuits, their personal life. like I tell my kids all the time, man, if there's one thing i don't want you to take from me, right, it's like I want you to just be at peace with yourself and and the work that you put in and that you deserve the good things that come your way.
Speaker: And I know it's hard because our industry attracts people who are driven. And they're always trying to bridge that gap between what they know and what they think they should know. And if there's one thing 30 years in this career has taught me, Mark, it's that you're never going to that's a race you cannot win.
Speaker: You're never going to get to that point where you're I'm satisfied now. And so instead you're just constantly chasing this, you know, this, this rabbit that's just out of reach. And like I said, that will make you successful.
Speaker: You will keep driving and driving and driving because you're haunted by this fear that you're not good enough or whatever it may be. But that doesn't mean you're going to be happy throughout that process. you know And so I see people...
Speaker: have imposter syndrome derail their career. you know I mean, I've worked with people that were so talented and they just didn't see it. And they would walk into a conference room and think, I shouldn't speak because I don't know this stuff. And it's like, you know this stuff better than anybody in here. And I don't know how to snap my fingers and take that away from people. Because like I said, I've never been able to do it for myself. But if I could give that one piece of advice, man, it would be find a way, right? Find a way to not to not have imposter syndrome be a career long day to day thing. it's It's okay to feel it in big moments or periodically check in your career.
Speaker: But if it becomes debilitating where like you can't take joy out of your successes or you're scared to try something because you don't think you're ready, like we talked about before, right, with starting writing,
Speaker: man, it's it's just no way to go through it, right? You're gonna have probably, like I said, a successful career, don't know how happy you're gonna be doing it. And so as I start winding down, right, my career and I think back about it, am I happy that I invested in myself and put in a lot of work outside of regular hours to learn the law? Yeah, I don't regret that, right? Am I glad that I tried my hand at something like writing that I always wanted to do or speaking that I was terrified to do? Like, yeah, I'm glad I did those things.
Speaker: But would all of those experiences have been made infinitely better if I could have just found a way through all that to not have the imposter syndrome, to believe that I belonged and that I was good enough and that I deserved the things that were coming my way? That would have changed the entire experience.
Speaker: And so... Maybe it's an empty thing to say at the end of a long podcast like this to tell people to believe in themselves. But man, without it, I don't know what else you're chasing, right? Like all the like i said, the promotions, the raises, the accolades from around your firm or your industry or whatever it may be, it's just not going to be worth anything unless you you know allow yourself to be proud of yourself.
Speaker: I love it. I love it. Well, thank you for sharing that, Tony. And thank you for being on here. This is exactly the conversation I hope we'd have. What strikes me is that two parts of today's episode are really connected the same idea, right? This curiosity, right? That we have in in just trying to explore How to get better? how do How do we understand who we are? The imposter syndrome, you know, and really getting that confidence. And your career has been built by continuing to ask better questions, reopening issues that others have considered settled, and then doing the hard work, as you just talked about, and turning complicated tax law or just complicated anything into boiling it down to something practical, right?
Speaker: And I think that is something that you should be extremely proud of what you've done. Well, I'm working on that piece. So thank you, Mark. Like I said, I am working on it because as like I said, as 30 years almost now has taught me, it's just like,
Speaker: if you're not If you're not going to be proud of yourself, doesn't matter if everybody else is, right? Like you it's you've got to be at peace with the effort you've put in and and what's come your way in return for it. And I know I'm not alone in this industry, like I said, with struggling with that. um and Hopefully, know, anybody else, somebody else hears it and says, you know, I'm not 30 years of my career. I'm 10 years of my career and I'm going to work really hard to make a shift in my mindset now and just be good with who I am.
Speaker: Absolutely. it's It's just look at how far you've come in your journey and and you know what? It's never over. You just keep moving along and keep getting smarter. That's it. So it's the goal.
Speaker: Yep. Well, thank you for sharing your journey, your technical insight and your passion for the profession and just who you are as a human being. So it's been an absolute pleasure having you on the Tax News Now podcast. Thanks, Tony.
Speaker: Thanks for having me, Mark. Glad we powered through despite the the illness. And what's beautiful about this day and age is people will watch our podcast. It'll take, what, an hour and a half? They'll have no idea what we went through behind the scenes with all the technology. It's all good, right? I know.
Speaker: I know. But I really appreciate you having me. And ah again, great conversation. Thank you. Yep. Thank you, Tony. And thank you to everyone for listening. Today's discussion is for educational purposes and not intended for tax or legal advice.
Speaker: The appropriate entity structure and the availability of Section 1202 exclusion depends on taxpayer-specific facts and circumstances, as Tony had mentioned. So please subscribe to the Tax News Now podcast, share this episode with your team and bring this conversation back to your team and your clients.
Speaker: Stay curious, keep asking better questions and never let a formation day decision quietly determine the economics of a business 10 years later. I'm Mark Gallegos. This has been the Tax News Now, a Becker Accounting podcast. We'll see you next time.
