Episode #190: The Truth About Tax Credits: Are They Too Good to Be True?

All right, everybody, we're talking about taxes this week on the weekly wealth podcast. So I feel compelled to let you know that this is not tax advice. This is general information.

And make sure to talk to your own tax preparer and or your own financial advisor to see how this information might apply to your specific situation. And as always, make sure that you do all the things.

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And I hope that this podcast can be just a small piece of that puzzle in your life. Okay. Hope that you enjoy this episode. Welcome to the weekly wealth podcast. I am certified financial planner David Chuddick.

This podcast and my wealth management practice are both designed to help the mass affluent to live better lives by how they handle their money. We talk about financial strategies, prosperous mindsets, and simply how to build true wealth. So come on and let's enjoy this journey together.

Well, hello, everybody, and welcome to this week's episode. We are talking about taxes today. This is a subject that we all want to avoid.

But, yeah, we're talking about tax credits and how you might be able to use them to mitigate some of your state income tax liability. So we have Harris Sinsley with us today. So, hey, Harris, how are you?

I'm doing very well. Thank you for having me on.

Yeah, yeah. So tell us a little bit about how you got into the tax credit world and a little bit about some of your, some of your credentials.

Now, I do have to tell you, I have a son going to the Darla Moore School of Business right now. But my office is like 10 miles away from where they wear a lot of orange. So I don't know, we may be enemies in one way and friends in another other.

Oh, no, that's all right. I went to Wisconsin for undergrad University Wisconsin Madison. So my allegiance is still largely live there.

But yeah, I did go to Darla Moore School of Business.

I did the JD IMBA program at the University of South Carolina School of Law in Darla Moore, following which I was practicing corporate tax attorney in Charlotte, North Carolina, for a number of years, doing everything from m and a being mergers and acquisitions, general corporate work, tax planning, and of course, tax controversy. And I dealt with clients that had significant tax liabilities.

I also dealt with a lot of clients that were not so great at paying their taxes because, as you mentioned, who loves paying taxes? And so I was introduced tax credits a while ago also because my father, Jay Sinsley, works at Monarch.

So that was a really great way to get into that world. And a little while ago, I made the transition to monarch private capital.

Awesome. So you are definitely the smarter guy on the show right now. And I have no problem, no problem saying that.

So let's, let's, let's go to the beginning and let's talk about tax credits. Is this a scam? Is this something crazy that's going to get, get me thrown in jail? Where do tax credits come from and why do they exist?

Sure. Absolutely. Well, tax credits, a lot of people know what tax credits are.

So at a very high level, a tax credit is a dollar for dollar reduction of a liability. And people have heard about tax credits in many different ways.

They've heard about, you know, if I go get a tesla, I may get some tax credits or put solar panels on my house. Or is that a way of the.

Government kind of modifying behavior and encouraging behaviors? Like.

Exactly.

We won't get into the EV controversy, but government wants people to buy EV, so they give a tax credit. Is that kind of what it comes down to?

Exactly. Exactly. 100%. And nowadays there are so many different types of tax credits because every single type of tax credit is exactly that.

It's a governmental incentive for positive purposes. And specifically, the tax credits that we work with at monarch are largely for positive developments within the state, at least at the state level.

So we're talking about, for a good example, in the state of South Carolina, where you are, we work with what are called historic tax credit programs as well as low income housing tax credit programs. And that's the government's way of trying to get developers to take action to develop certain types of buildings, low income housing buildings.

Or, you know, those historic credits that I mentioned, those are largely comprised of mill credits. If you're in South Carolina, you seen them all over the place, these mills that are converted into apartments and restaurants and breweries.

And it really helps out the community. So the tax credits come from the government.

In South Carolina, the historic statute came around in about 2002, and then in 2020, they created a low income housing tax credit program by statute. So these are, you know, not scams, as you mentioned, they're created by the legislature.

And, you know, then these developers will receive the benefit of the tax credits to mitigate their tax liability if they so choose. And many do. Many have said to me, hey, Harris, I was not going to get into this building without the benefit of these tax credits.

It did not make financial sense. But what's great about these programs is they're also transferable.

So Monarch will step in, will come in and provide funding to the developers to become a tax credit partner to receive the benefit of the tax credits that flow through to a fund that we set up. And then I'm out there now working with anybody and everybody with tax liability to try to mitigate it. So that's all at a very, very high level.

Yeah. So you said developer. Now, if I'm an individual and I want to kind of take advantage of this, I'm not a developer.

So how do I take advantage and potentially save and use these tax credits to help me, David, the individual, lower my own state tax income liability.

Yeah.

A lot of people don't have the capacity to just jump into a, you know, development project, but that is a way that a lot of people are first introduced to these credits if they are on a project firsthand. The great thing is that you don't need to be involved. That's what we're there for.

We come in as a partner in that development, and the credits flow through into funds that we set up. And then all an investor needs to do is they come and speak to me, they say, hey, I have a tax liability.

I'm looking at spending $100,000 on my South Carolina taxes, which is really high. But, you know, good problem to have.

Yeah, it's a good problem to have, but, you know, they still want to mitigate that, but they're not involved at that, you know, the base level of the development. All they need to do is contribute into a partnership, become a partner, and the credits are allocated.

So to take a step back, there are two main types of credits. There are certificated credits and allocated credits at the state level.

In most states, specifically in South Carolina, we're talking about those allocated credits that, again, flow through from the developer to the funds, then to an investor.

Certificated are what you would think of when you talk about film credits in many states like Georgia, Illinois, Connecticut, but, you know, none in South Carolina, unfortunately.

So, yeah, to address your question, all they need to do is to become a partner in the fund and they receive the credits that flow through to them on a k one, and that's a capital contribution that they're making into that fund to become a partner.

So you mentioned the hypothetical hundred thousand dollar tax liability. So if they get involved with you potentially, how much money would it cost them to mitigate that $100,000 tax liability?

So what we're working with at Monarch right now, again, are those historic tax credits in one fund and loan composing tax credits in another, both of which, with what we work with, are at $0.88 on the dollar.

So what that means is instead of next April or October, if you're an individual and extend just cutting a check to the state for $100,000, it would be that capital contribution that I mentioned for $88,000. And then next year you'd receive the benefit of 100,000 worth of tax credits that flow through to you on that k one, as I mentioned.

And that's saving the 12,000 right there.

At least on the South Carolina income tax component, there is a federal treatment that's important to recognize because as you mentioned, this seems too good to be true. I just save money and that's it. I don't have to do anything else. And yes, that's true, but it's important to recognize the totality of the situation.

There is always federal treatment. If the IR's can get their hands on more tax revenue, they're certainly happy to do so.

So it's worth mentioning that the investment is also a capital, one of the capital holdings. So you're going to have capital asset treatment for these tax credits. And by that I mean it's similar to any stock, any other capital asset.

If you hold the tax credits for over a year, then you're going to have long term treatment at the federal level, or if it's a holding period of less than a year, that's.

But that might be a little bit too high of maybe I'm getting ahead of myself and I don't want to confuse too many people because at the end of the day, the savings at the state level are really what are key and what most people care about saving themselves money on their taxes.

So is it fair to say from a 30,000 foot level you'll save 12% in South Carolina? Now there are different credits for different states, but in South Carolina it's 12%.

But your net savings is going to be something less than 12% because some of the IR's is going to recognize that 12% savings as a gain and then they're going to take a cut of that as form of a tax, whether it be long term or short term. And of course, we could discuss individually offline which the individual would be recognizing. Is that a fair way to put it?

Yeah. Yeah, I think that's a really good way to put it. Exactly. Yeah.

State level, when you're just looking at your income tax return, it's 100,000 in credits. In our example, that you made a capital contribution of 88,004.

So at least when you're looking, you know, narrowly at that South Carolina income tax return at $12,000, that's mitigated right there. And then, as you said, there's a.

There's a federal treatment that, you know is worth recognizing because it's there, and you just need to figure that out whether you know what your holding period is going to look like.

Okay, so I love the accountants of the world. I think the CPAs, the EAs, the tax preparers, they have a really hard job. I know a few of them that.

That almost pull all their hair out during a few months out of the year. But I could imagine a listener saying, yeah, but, like, I've never heard of this. This Harris dude is just scamming me. I don't know who he is.

My accountant never told me about this. I. How come people have never heard of this? Or why is it not that widely known? Because it sure does seem like a pretty good deal.

Oh, it certainly is. And as I said, they've been around at the state level in South Carolina for many, many years.

It's worth mentioning that they've been around at the federal level for these historic credits and such for even longer. And now we have the renewable energy credits. I think a lot of people are familiar with them to some degree.

We mentioned the ones that I think a lot of people know because they're so widely talked about in the news. Ev credits, solar child care tax credits are a very big one in the news right now.

But at the state level, it's really all word of mouth that, yeah, you hope your CPA is going to bring to you.

And to that end, you know, I hope I'm working with your CPA because we have competitors in the space, but it's obviously a very niche industry, and it's one that if you haven't had exposure to it, then it does seem too good to be true.

It may or may not surprise you that I work with a lot of cpas, even, that have nothing heard about this or have not taken the time to look into it, because even they themselves think it's too good to be true. And that might be due to many different things. But cpas, to their credit, are pretty well overworked. Now.

There's not as many of them in the industry as there really needs to be. And so it takes a lot of effort to step out of your comfort zone and, uh, dip your toes into some new waters.

Uh, that said, um, you know, there's certainly a wonderful asset to add to any portfolio to think about. I want to recommend these to my client. I want to provide some value adds, uh, any, any kind of advisor, uh, you know, at any level.

I work with attorneys, wealth managers, financial planners, cpAs, CFO's and more. But yeah, to get back to your question, I understand why it maybe seems like they're too good to be true.

Then when you hear me talking about the complexities of the taxes and the federal treatment and the partnership set up and all, we hope to dispel those feelings by showing we've been doing this for 20 years at Monarch. You know, that's a very real thing that's there for the taking.

You know, what I find about the CPAs and the accountants and the eas of the world is they're very good at saying, hey, Harris, it's April 14 and here's what you owe from last year. We made detailed calculations, we made accurate calculations, and here's your tax liability. And if you pay that, the IR's is going to be happy.

I don't want to paint with a broad stroke, but many tax preparers are not great at saying, hey, you know, it's late 2024, but we're not at the end yet. So there's some things that we can start doing before the clock hits midnight on December 31. So let's look at some of those things.

And some of those things might just be maxing out retirement plans. It could be accelerating some expenses for things that you have to buy anyway, and it could be tax credits.

And so I think it's important to have kind of have an attitude that tax planning is like a year round strategy. It's not just, oh, crap, it's the beginning of April and we have to file our return and we have no idea how much money we're going to, going to need.

So I think it's a very, very holistic issue.

Is there a specific type of person or type of investor or level of investor that one would need to be in order to qualify for these, for these tax credits?

So whats important to work with a company like Monarch is that someone is an accredited investor, which is not a very terribly high mark to meet.

Accredited investor, just meaning that if youre an individual, you make an excess of $200,000 or married being 300,000, or you have an excess of a million dollars in total assets, excluding your primary residence. And that's just reg d, you know, sec stuff. Um, you know, and now, would your.

Interest, your ownership interest in a business, could that count towards the million dollars?

Uh, so it would be the totality of the asset test. So I believe so. Um, yeah.

Okay.

So, um, but what's, you know, really important, and I wanted to take a step back to something you just said about planning year round, is that one of the great investors that I've seen in these tax credits are people that sell their business. And this is not exclusive to sellers of a business, but you could sell your business in January of 2024 and have a significant liability.

And as a former m and a attorney, I know that that could be the largest liability that many people have in their life.

And yeah, if your CPA isn't saying to you in January of 2024, soon thereafter, you know, we can do something to address this now, then you could run the whole year through and, you know, next year you're just going to cut a massive check.

So they, they are certainly rate investors and utilizers to say of tax credits, because, you know, who doesn't want to keep more of their hard earned money in their pocket after selling their business? But I'd say that's true of anybody else. Everybody wants to keep more of their hard earned money in their own pocket.

So again, once you hit that accredited investor status, we're happy to work with you at the state level for pretty much any liability. So these are great for obviously high net worth individuals, institutional investors as well.

I'm not sure this necessarily applies to many of your listeners and many financial advisors, but banks utilize these credits to meet their community investment act requirements. And insurance companies also utilize tax credits as it offsets a premium tax for them, which is a big deal for insurance companies.

But otherwise, you know, the more you pay in taxes, the more you can save utilizing these credits. And you know, it's important to say that that's obviously the point that most people care about.

But I think it is also important to recognize the benevolent side of these credits as well, that they come from these positive community development programs. And it's something tangible that you can go out and see.

You can go see the brewery that, you know, we worked with you can you have more of a say so in where your tax dollars go, rather than just paying them to the government and letting them do whatever they want with them and the government wants you to do this, that's why they created these programs? Oh, absolutely.

Per statute, depending on the type of credit, there are limits and then there are limits that a company like Monarch and our competitors have in our inventory each year. Often a company like Monarch will do a lot of our work in the beginning half of the year for that exact reason. They go fast.

Once somebody learns that they don't have to necessarily pay a full tax bill, they never want to do so again.

And, you know, it just so happens in South Carolina right now, Monarch still does have an inventory, but, you know, in many other states that we worked in, that's no longer true for 2024. Yes, yes, most do, at least to some degree. It may be in various different sectors.

As I mentioned, I've brought up the historic and long term housing a lot because you're in South Carolina and a lot of your listeners likely are as well. But there are various different types per state. And Monarch has worked in over 40 states as well as DC. DC, without even being a state.

If you're a resident DC, you're still paying taxes to the government. They have tax credit programs as well.

All right, everybody, so here's your takeaway.

If you are an accredited investor, which means you have a $200,000 income if you are single, or $300,000 combined income if you're married, or if you have a net worth of a million dollars, excluding your primary residence, email me, david@parallelfinancial.com dot let's set a time.

Let's just kind of chit chat about this, and then if it looks like this is something that makes sense with you, uh, we can, we could have a conference call with Harris and we could talk about more details and see what the next steps might be. Now, this is something, I don't sell this. I'm not making any money off of this.

This is just a way that I'm trying to bring value to my clients and prospects. Because who does not want to pay any less taxes, right?

I mean, if we can, if we can save 8910, 12% on our state income taxes, I think that that is a really, really good thing. So awesome. I love it. I think this is great information.

But we are the weekly wealth podcast, and we talk about the mindsets, the tactics, and the strategies to help you to build and maintain wealth. So, Harris, what is your definition of wealth? What does wealth mean to you, to your family and the people in your life that you love and care about?

I think that's changed a lot over time for me. I can think back to when I was in law school and business school, and all I could think about was coming out and making as much money as possible.

And for many people that are in those similar types of programs. That's a big driving factor.

And even in my first few years of practice, I remember finally making a decent sized paycheck and being able to afford fun vacations and random fun things. I'm pretty obsessed with Star wars, so I have a lot of collectibles now that I was able to accumulate, and for a while, that felt really good.

But honestly, I've been thinking about this lately, and I think that it's the stability that money can provide that, you know, wealth really comes down to how you feel within your life and your security within your circumstances. And obviously, the more money you make, that can be very helpful in doing so. But, you know, that's not necessarily everything to everybody.

This is not to say that I am trying to not make as much money as I can, because I certainly would love to continue to do so as I progress in my career. But it's now figuring out where that money should be best applied and how to utilize and save for the future.

Because I think wealth really means security and stability for me.

Yeah, you know, it's not really about the money. It's about what the money can do, is the way that I look at it.

If you had four flat tires, and if you needed to buy four new tires, it's kind of just a crappy day and inconvenient if you have the money to buy the tires. But if you don't have the money to buy tires, it could literally be a catastrophic day.

Cause now you can't get to work, you get fired, you know, all these horrible things. So I think that having money, um, you know, money can certainly solve a lot of problems, and there's no, uh, no question about that. Well, super. I.

I appreciate that we're talking about this subject.

I think that there's a lot of planning that we can all do in our lives on the financial side, whether it's on your own or working with a financial advisor like myself, that can just be purposeful and that can put us in a better position financially. And sometimes you don't know what you don't know. Which is why I wanted to, uh, talk to you and.

And have your knowledge given out to, um, to the listeners of the weekly wealth podcast. So I really appreciate your knowledge. And, yeah, like I said, I have a senior down at the Darla Moore school of business, and he is.

He's going to rule the commercial real estate world when he graduates. He's excited about it.

There you go. Love to see it. And looking forward to meeting him at future alumni events.

All right everybody, so if this interests you, if saving 8910 12% under state income taxes sounds like it is an idea that would work for you, email me.

David@parallelfinancial.com or you can simply go to my website, www.weeklywealthpodcast.com, click on the Contact Us button at the top and set a quick appointment. We can talk about it. And if it makes sense to to have a Zoom call with Harris and talk about your specific situation, I am more than happy to do so.

Because hey, if we could help some people to potentially save some money on their taxes, I am all for it.

Let's do it. Thank you for having me on as well.

So until next episode, I wish everybody a blessed week. Thanks Harris.

Thank you.

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