Case Study
Nth Degree Helps Online Marketer Save $200,000 in Taxes, Causing A Surprisingly Large Ripple Effect...
Case Study
Nth Degree Helps Online Marketer Save $200,000 in Taxes, Causing A Surprisingly Large Ripple Effect...
Introduction:
When an online marketer approached Nth Degree to plan for their tax liability, they discovered an opportunity to offset their business profits through short-term rental investments. But that was just the beginning.
About the Client:
Our client is an online marketer generating approximately $2.5 million in annual revenue. When they engaged our financial services in May, they were facing a potential tax liability of $200,000 and were seeking guidance on tax planning strategies.
The Challenge:
Our client felt that introducing real estate into their investment strategy might help reduce their $200,000 tax bill and also aid in future tax situations for years to come. Before speaking with Nth Degree, they were introduced to a short-term rental guru who partnered with his clients to invest in properties. This guru managed a portfolio of around 200 properties.
Unfortunately, the guru’s accountant wasn’t performing at the same level as Nth Degree and failed to properly categorize these rental properties, meaning our client, and all of the other guru’s clients, was about to miss out on the valuable write-offs they were looking for.
The Nth Degree (UN)Conventional Approach:
Our team at Nth Degree reviewed the tax returns prepared by the short-term rental guru's CPA, who, despite “specializing” in short-term rental tax filings, missed a pivotal element.
We discovered the critical error: the CPA had reported the rental income on Schedule E (real estate) instead of Schedule C (business).
This distinction is crucial because short-term rentals are treated as businesses by the IRS, allowing investors to claim losses through accelerated depreciation without requiring Real Estate Professional Status (a threshold most business owners can’t reach unless they make real estate their full-time gig).
The Solution
We brought this error to the attention of the CPA, citing the IRS guidance that clarified the proper reporting of short-term rentals. As a result, the CPA had to amend the returns for not only our client but also the guru's 200+ other investment partners.
The Impact
Our client saved $200,000 in taxes, and hundreds of other investors benefited from the proper tax treatment of their short-term rentals. This case demonstrates the value of proactive tax planning and the importance of working with advisors who actually stay current with tax law changes (which is much more rare than you’d expect).
200+ investors experienced a win thanks to our efforts.
The Counterfactual:
Had we not caught this error, our client and the 200+ other investors would have likely continued to overpay their taxes, potentially for years to come. This oversight could have cost them collectively millions of dollars in lost savings and missed investment opportunities. Shudder.
The cool part?
The cool part of this story is that the money saved extended far beyond our client. By identifying and correcting this error, we were able to create a ripple effect that positively impacted hundreds of other investors, showcasing the true value of expert tax planning and advisory services.
If you’re a business owner or investor considering short-term rentals or other complex assets, it’s crucial to work with a team of advisors who deeply understand the tax implications of your specific situation.
By staying up-to-date with the latest tax laws and guidance, you can identify opportunities to minimize your tax liability and maximize your wealth for years to come.
If your business does $1M - $10M/year and you’d like to explore investing in real estate for wealth creation and tax mitigation, you may consider booking a call so we can see if you’re a good fit for our services.
Explore Nth Degree
Resources
Contact information
1809 7th Ave Ste 303
Seattle, WA 98101
4025 Delridge Way SW, Ste 320
Seattle, WA 98106
(206) 682-0281
2024 Nth Degree CPAs | All Rights Reserved
Introduction:
When an online marketer approached Nth Degree to plan for their tax liability, they discovered an opportunity to offset their business profits through short-term rental investments. But that was just the beginning.
About the Client:
Our client is an online marketer generating approximately $2.5 million in annual revenue. When they engaged our financial services in May, they were facing a potential tax liability of $200,000 and were seeking guidance on tax planning strategies.
The Challenge:
Our client felt that introducing real estate into their investment strategy might help reduce their $200,000 tax bill and also aid in future tax situations for years to come. Before speaking with Nth Degree, they were introduced to a short-term rental guru who partnered with his clients to invest in properties. This guru managed a portfolio of around 200 properties.
Unfortunately, the guru’s accountant wasn’t performing at the same level as Nth Degree and failed to properly categorize these rental properties, meaning our client, and all of the other guru’s clients, was about to miss out on the valuable write-offs they were looking for.
The Nth Degree (UN)Conventional Approach:
Our team at Nth Degree reviewed the tax returns prepared by the short-term rental guru's CPA, who, despite “specializing” in short-term rental tax filings, missed a pivotal element.
We discovered the critical error: the CPA had reported the rental income on Schedule E (real estate) instead of Schedule C (business).
This distinction is crucial because short-term rentals are treated as businesses by the IRS, allowing investors to claim losses through accelerated depreciation without requiring Real Estate Professional Status (a threshold most business owners can’t reach unless they make real estate their full-time gig).
The Solution
We brought this error to the attention of the CPA, citing the IRS guidance that clarified the proper reporting of short-term rentals. As a result, the CPA had to amend the returns for not only our client but also the guru's 200+ other investment partners.
The Impact
Our client saved $200,000 in taxes, and hundreds of other investors benefited from the proper tax treatment of their short-term rentals. This case demonstrates the value of proactive tax planning and the importance of working with advisors who actually stay current with tax law changes (which is much more rare than you’d expect).
200+ investors experienced a win thanks to our efforts.
The Counterfactual:
Had we not caught this error, our client and the 200+ other investors would have likely continued to overpay their taxes, potentially for years to come. This oversight could have cost them collectively millions of dollars in lost savings and missed investment opportunities. Shudder.
The cool part?
The cool part of this story is that the money saved extended far beyond our client. By identifying and correcting this error, we were able to create a ripple effect that positively impacted hundreds of other investors, showcasing the true value of expert tax planning and advisory services.
If you’re a business owner or investor considering short-term rentals or other complex assets, it’s crucial to work with a team of advisors who deeply understand the tax implications of your specific situation.
By staying up-to-date with the latest tax laws and guidance, you can identify opportunities to minimize your tax liability and maximize your wealth for years to come.
If your business does $1M - $10M/year and you’d like to explore investing in real estate for wealth creation and tax mitigation, you may consider booking a call so we can see if you’re a good fit for our services.
Introduction:
When a high-end spa owner in Sonoma was ready to exit his business and bring in new investors, he turned to the financial masterminds at Nth Degree CPAs. What they uncovered changed his entire retirement.
About the Client:
Our client, a luxurious Sonoma spa owner in his mid-70s, had been operating his business on a stunning property for many years. He was eager to pass the reins to a trusted employee and enjoy a well-deserved retirement.
The Challenge:
When this spa owner decided to sell, he assembled a team of advisors, including a business advisor, attorney, and real estate broker, to help devise an exit strategy and valuation. The real estate broker valued the business at $1.7 million, and the entire assembled team proposed converting the partnership to a C-corp to bring in new investors.
But to get a second opinion, he brought in Nth Degree CPAs.
When our financial sleuths dug into the spa's books, we discovered:
The real estate broker's valuation was flawed, way too low, and lacked justification (no shade but the real estate broker was not qualified to evaluate a business -- look out for this).
$500,000+ in potential tax liabilities, plus penalties, due to distributions in excess of basis.
The proposed restructuring would trigger taxable events for the owner and employee without any cash inflow.
The Nth Degree (UN)Conventional Approach:
We at Nth Degree worked closely with our client and his team to develop a comprehensive strategy that addressed the identified issues and optimized the exit plan. The key components of the solution included:
Conducted a proper valuation, revealing the spa's true worth of $4-5 million.
Amended past tax returns to correct for distributions and minimize tax liability.
Identified and claimed missed R&D tax credits for the spa's unique treatments.
Restructured the entity to separate operations, real estate, and IP for a tax-free transfer.
Designed an earn-out structure giving our client upfront cash and $5-6 million more as new investors came aboard.
The Solution
With Nth Degree's genius strategy, our client:
Eliminated $500,000 in potential tax liabilities.
Increased his potential valuation by 2-3x, from $1.7 million to $4-5 million.
Exited the business with no immediate tax consequences and the huge upside potential cited above.
Transferred equity to his trusted employee tax-free.
Optimized the business structure for a seamless transition to new ownership.
As Dan Nicholson put it, "This case highlights the importance of having a comprehensive understanding of a business's financial situation before making major decisions. By uncovering hidden liabilities and developing a tailored strategy, we were able to help the spa owner avoid significant taxes and penalties while maximizing the value of his life's work. That's the power of proactive, expert financial guidance."
The Impact
By partnering with Nth Degree CPAs, our client not only avoided a financial catastrophe of triggering several taxable events and missing out on a much larger valuation of his business, but also unlocked the true value of his life's work.
He was able to exit his business on his terms, secure his financial future, and set the stage for a thriving legacy.
His trusted employee also benefited, receiving equity without any tax burden. The spa is now poised for a new era of success under new ownership and investment, thanks to the optimized business structure.
The Counterfactual:
Without Nth Degree's intervention, our client would have likely proceeded with the flawed restructuring plan based on the real estate broker's lowball valuation. This type of thing makes us lose sleep at night. No one thinks that an advisor is messing up so badly -- but we see it happen frequently. At the very least, it never hurts to double check on what an advisor tells you. In this case, our client would have been hit with a massive tax bill, sold his business for a fraction of its worth, and missed out on the opportunity to maximize his life's work. His trusted employee would have also been saddled with an unexpected tax burden.
Ready to Bring on New Investors or Profitability Exit Your Business?
If you're a business owner of a $1M - $10M+/year company considering an exit or looking to bring in new investors, you might explore booking a call with Nth Degree's talented team so we can see if you’re a good fit for our (UN)conventional strategies that could help you navigate the complex financial and tax implications of your decisions.