45: Save 20% of Your Payroll with Julio Gonzalez

15
Jun

Julio Gonzalez is the CEO and Founder of Engineered Tax Services, the country’s largest specialty tax engineering firm specializing in the preservation of wealth through IRS engineering-based services. He is also the CEO of Growth Partnership, the only full-service multi-disciplinary consulting firm serving accounting professionals. We talk about tax engineering, tax incentives for small to medium-sized businesses, and work opportunity tax credits.

—

Listen to the podcast here

 

Save 20% of Your Payroll with Julio Gonzalez

Our guest is Julio Gonzalez, who is the most interesting man in Tax. He is the CEO of Engineering Tax Services, the largest boutique engineering tax services firm in the country, also called ETS. He basically set out to democratize tax engineering so that small and medium sized private companies can gain access to the same tax planning advice that fortune companies enjoy, courtesy of their big four accountants. Mr. Gonzalez is also the CEO of the Growth Partnership, the only full service multidisciplinary consulting firm serving the accounting profession and Able CRM, a marketing and business development software for accountants. So welcome to the show, Julio.

Thank you for having me. I appreciate it.

So that’s a great slate of companies all are serving the tax and accounting profession. Sounds like you had quite a journey coming here. So tell us a little bit about how you got here. What is your entrepreneurial story?

It’s been a wonderful journey. Well, thank you for having me again. I had worked out of college in the 80s, working with the largest accounting firms in the country. And we were doing a lot of sophisticated tax credits for the Fortune 500 public companies here in the United States. And I realized in the late 90s that these tax credits were available to all small businesses, but that every accounting firm outside of the big ones in the United States, were not gonna be able to have access to the technical staff to provide these tax credits to their clients.

And I wanted to make sure that all small businesses took advantage of tax credits associated with building employment in the United States, innovation, investing in infrastructure. And I thought that just the Microsofts of the world, the Googles of the world, they were the ones that had access to it, but I felt like every small business should have that access. So that’s what I set the journey out to be.

And I started in 2001 to, you know, make my services available to all accounting firms so that when their clients were doing these great activities, innovation, employment growth, and infrastructure investing, that they had a resource such as myself that was an engineer and a scientist and a tax expert that could qualify their clients for these tax benefits.

And so, the last 20 years has been a great journey to help small businesses across the country, that journey, you know, 20 years long, but still in its infancy, right? We work with several thousand accounting firms, but there’s so many more accounting firms and small business owners that we have to make sure are aware of these tax benefits. So we appreciate being on your show to make sure that we get that education out across the country.

So, this is a fascinating concept to me. I personally had some experience. You know, I started life with KPMG as well. And I also was, for a time, I was on the board of a company that provided tech services. It was an Irish company for multinationals. And I was in Hungary at the time. And they would come together every quarter. You had these high-priced partners, PricewaterhouseCoopers partners.

They would fly into Budapest, and they would spend a day there, and they would go through, essentially, they had a board meeting to make sure that what they are doing is actually happening in that jurisdiction. And it was a very expensive process. I mean, you had all these people who were flying in and out. These are not cheap experts, like 8, 12 people. They hired board members locally who had good standing in the community. So it’s a long way, a long winding way of asking, how is it possible for you to do this at the boutique level and to make it accessible and financially accessible to small companies?

You know, that’s a fascinating story that you just shared. And, you know, many accounting firms here in the United States don’t have the resources that KPMG would have, don’t have the ability to bring in experts like yourself to fly to Budapest and talk about tax structures and the way to preserve wealth for these big corporations. That’s a far stretch for the small accounts and their clients here in the United States. But that’s a meaningful story because that’s what happens for the Fortune 500 companies, the public companies.

They can hire the KPMGs, they can hire the consultants and they can spend a lot of money because I know it’s not cheap but in the end, it’s really an investment for them, right? Because they’re bringing down their tax liabilities, they’re putting companies in Ireland where there’s tax credits for employment and low income tax rates and they’re doing all these necessary steps at a global level. Well, we wanted to be that resource for the accounting community.

So we have hundreds of staff members here that are engineers, that are scientists, that are advisors that have come from that, you know, big four level or the big eight level, you know, back in the 80s and 90s. And we try to be that resource in a, you know, a significant way here in the United States, right? Because just exactly what you shared is what every small business should have access to, but they don’t have the money, right? They can’t afford KPMG, they can’t afford the advisor. So why don’t we be a resource to their accounting firms and help with some of that sophistication?

Listen, we’ll never get to the level of KPMG with our accounting firms and all these different structures, but we can at least help with tax credits for employment, for infrastructure, for innovation, much like you see in Ireland, much how you see across the country, Canada, Australia. We want to make sure that every small business owner here in the United States is rewarded for those activities that Microsoft is rewarded for every day and has access to every day.

Okay, so I’d like to get in with you, get with you into this, the limit of the details of that. But before we go there, I’d like to ask you more about your entrepreneurship first. You know, this podcast is called the Management Blueprint Podcast, and what you’re looking for is frameworks, management, I call them management blueprints that entrepreneurs use to build their businesses to essentially implement major management concepts in their businesses. So you have built at least three very successful businesses. I know there are more. I do want to take more time to introduce you. There are more there that you have done. So are there some concepts that you could share with our listeners that you intentionally implemented in your businesses to make them scalable and more successful?

Well, that’s a good question. And certainly I didn’t grow up an entrepreneur and didn’t have the knowledge to be an entrepreneur. It came almost out of necessity. You remember back in the early 2000s, I was with Arthur Anderson, the largest accounting firm in the world at that time and because of this situation with Enron, if people can remember back to then, the government shut down Arthur Anderson overnight and the largest accounting firm in the country and the world was closed.

So I didn’t know what my next step would be and I was concerned that the government was going to start shutting down the big accounting firms like they shut down Arthur Anderson. So I decided at that point to control my own destiny because clearly working for the largest company in the world that serves accounting and advisory services can be shut down. And so I decided that what I was doing there, I could do for a small business firm, you know, and CPA firms across the country.

So that’s what I set out to do. I had a little bit of savings. So number one, always have some savings, right? Invest in yourself because if you have some savings, you can try to invest in your entrepreneurship and try to bring things to the community that aren’t necessarily available. So one was investing in myself and then, you know, when I made some money coming out of opening my business, investing that money back into the business. I think you have to invest in yourself, invest in your business. I see so many entrepreneurs that take their profits and invest in personal assets that maybe don’t bring back benefit to the company.

So I think that you always have to invest in yourself, believe in yourself, surround yourself with great mentors. Right, because I didn’t go to school for entrepreneurship, but I certainly knew that I had to surround myself with great mentorship, people that could help me navigate the seas of starting a business and growing a business and I think that was really important. So I would say those are some of the things I felt were most important in terms of starting the business and then also not having faith in great positivity, right? I mean, as an entrepreneur, you’re going to have roller coasters up and down. And so short memory of the bad days and great confidence, but great, you know, positive energy.

You always have to invest in yourself, believe in yourself, surround yourself with great mentors. Click To Tweet

Definitely. Us entrepreneurs cannot afford to be pessimistic, right? We have to always be optimistic and always have the energy and project the energy out to other people to be able to continue building. All right. So let’s talk about text engineering. So what does it mean tax engineering and how does it help smaller private companies, smaller medium-sized private companies?

Sure. Well, in the United States, we’re unique in the sense that real estate, when we invest in real estate as a business owner, as an individual, real estate’s one of the few assets in the United States that you can invest in and you can also expense it. Here in our country, you expense real estate over 30 to 40 years depending on the property type. But we have tax law that allows an independent engineer to go into a real estate investment and determine what components of that building are non-structural.

And so as an engineer, we’ll go into a real estate investment, we’ll determine that 30 to 50% of the building is non-structural, it’s flooring, it’s HVAC systems, heating and cooling systems, it’s mechanical systems, it’s plumbing systems, it’s landscaping, it’s things that are not structural in nature. And in this United States tax code, those assets then can be expensed immediately. So if we had an investor that bought a building for his business and he paid a million dollars, we may be able to qualify half of that or $500,000.

That could be expense day one under the engineering report that the IRS requires. So that’s tremendous because the other balance would obviously be depreciated over 30 to 40 years, but that 500,000 could be deducted immediately. And what does that mean? That means he can lower his income tax, liability, which helps him preserve cash. And ultimately, that cash can be used to invest in his businesses as well. And so I’ll say this, I mean, this was so dramatic during COVID, right? Because we had so many small business owners that were struggling to keep their doors open. We did the cost segregation studies on their billing.

Not only did we create lower tax liabilities, but we created losses. And they were able to take those losses and carry them back to get refunds for the years that they were paying in taxes. So, you know, it was just a godsend for our clients, but, you know, we probably do several thousand reports a month. And I feel so great for these people that invest in real estate and take advantage of this component depreciation through our engineering studies to make sure that they’re going to preserve their wealth and retain that to invest in capital for their businesses. Now, that’s on the real estate side.

You know, I would share with you that we also had a tax law that came into place in 2006 to make buildings more energy efficient. And when buildings are made energy efficient or they’re retrofitted to be energy efficient, the IRS requires a licensed engineer to go in and calculate the energy sufficiencies to see if it’s surpassing the guidance that the IRS prescribed. And if we’re able to do that, then we’re also able to get our clients more tax incentives for doing all the right things, bringing down the energy consumption in their building, but also being rewarded with federal, state, and local tax incentives.

So, you know, that’s two areas of the tax code where real estate and engineering and accounting come together, right? So, I told the accounting firms, the last 21 years, you have a client that buys real estate, we got to make sure that he takes advantage of these tax benefits to lower his tax liabilities, preserve cash and invest in his own business. So, you know, that’s what we’re doing on the real estate side.

Now, let me ask you before we go over. Let me ask you about this real estate. So just for me to understand. So let’s say I buy a real estate property for ten million dollars and up to five million could potentially be segregated. is the way you call it, and expensed. And I would then maybe reclaim some past taxes that I paid, maybe, you know, up to 30% of that amount. Maybe it’s $150,000. So could it be that essentially I can buy this real estate with no money down? Maybe there’s some cash flow, you know, I have to put the money first and then I became the taxes, but essentially in year one, it could be a net zero cost investment for me. Is this possible?

That’s exactly right. And I would share with you, that’s how the larger sophisticated real estate families and investors go about building their wealth through real estate, through these tax incentives and programs that basically allow you to do this and build this empire through virtually no cash down. Let me give you another scenario. So say at the end of the day, I have a million dollars in tax liability and my account says we got to write the IRS a check for a million dollars.

Well I could have taken that same million dollars and put that down as a down payment on a building. And at million dollars, the bank would finance, you know, 4 million, they would come in at 75 to 80 percent. So the same million dollars I have to write to the IRS, now I’m writing as a deposit or a down payment for the building. And now through that acquisition, I’m getting a two and a half million dollar write-off. So I’m getting the same benefit but instead of that money going to the IRS it’s now going to me to purchase an asset that’s going to appreciate, that’s going to generate income.

And so you know there’s two scenarios here but both like you said we could go back get refunds and that could be our cash payment. Or we could use some of our cash and get the same benefit as, you know, or be out of the pocket the same amount as paying the IRS. And I think this is where we see people in the real estate industry here in the United States do so well because of these tax benefits.

Sophisticated real estate investors build wealth through tax incentives, allowing them to invest in properties with virtually no cash down and reap significant benefits. Click To Tweet

Okay. I never understood this. So this is this is fascinating that you explained. OK. All right. So I’m already thinking what to be realistic. I buy for no money down. Maybe it is possible after all. So that’s the real estate part. And you also mentioned that there are other ways for small businesses to save on their taxes. Can you give other examples?

The other way we get involved, and this is something that’s fairly global, is the research and development tax credits. Now, research and development tax credits is, in essence, a refund of labor that companies pay their employees to create better systems, better products, quick products, quicker, cheaper. So, it’s innovation within a company, specific to that company, to make something, create something through research, through experimentation.

And so that labor, say we have a million dollars of our labor that’s always invested in making a product better, quicker, more innovative. We give tax credits for that labor because we want those jobs here in the United States. We don’t want to lose those jobs So we have that specific tax code. Now if we qualified a million dollars of labor We could get 20% of that through the research and development tax credits as a refundable credit, you know under the federal guidelines. Now a lot of states also matches so it could be up to 40% of that specific labor is basically a credit that is refundable that can help with equity.

Now, the biggest issue, now obviously the Microsofts of the world, the Amazons of the world, you know, we always hear in the paper they don’t pay any taxes, what’s going on, but really it’s the research and development tax credit that they’re taking advantage of and so they’re getting a big portion of their labor refunded. Now this R&D tax credit in the United States is prevalent throughout the world. I mean Ireland has one of the best R&D tax credits in the country, Australia a very strong one, much stronger than the United States, but they specifically want that kind of job creation in their countries.

But we have it here in the United States, it’s very generous. The issue is that most companies don’t take advantage of it. They’re not the Microsofts of the world. You know, they’re not the Amazons of the world. They don’t have a big four KPMG behind them. They don’t have the advisors behind them. And the accounting firms don’t have scientists and engineers in place to determine of that product or service, how much of that labor was innovation, was experimentation, was research, right? So again, we try to be that resource to the accounting firms so that we make sure and help them and their clients determine that.

Because every business, every small business owner probably has some type of research and experimentation going on within their business, but they don’t take advantage of it. So, you know, we have a long mission, right? We want to make sure that every small business owner benefits the way that the Amazons, the Microsofts of the world, you know, benefit from our tax code. But again, we have to get that education out to the country.

So, Julio, let’s just take an example. So, let’s say I have several clients who are between three and $20 million in revenue. Maybe their payroll is, I mean, these are typically service businesses, professional service like yours. So the payroll would be anywhere between 60 to 70 percent of their revenue. So let’s say a company with three million revenue and two million payroll, would it make sense for them to do this or they are too small and they couldn’t carry the expense of doing the research and the technical reporting?

Well, we do it for all small businesses. That’s our mission, right? So if they’re a startup and they have payroll, we wanna make sure they’re taking the benefits, right? So they could be at zero revenue, but they still have payroll. They have payroll taxes that can be refundable. But certainly the million dollar payroll, 2 million, we wanna make sure that every small business owner takes advantage of it. And in service industries, think about all the experimentation. In my own company, right, we’re always trying to find ways to do services quicker.

We’re trying to automate through artificial intelligence, through better software applications. We’re always trying to do things so that we’re becoming more, you know, improving our margins. So, you know, that labor is ongoing. It’s all the time. We’re always working to make our businesses, you know, even small businesses, service companies better. And I think that’s an important tax benefit. And again, some states match it. And I’m going to share this too, that during COVID, we enhanced those benefits, right?

We passed three different tax laws or groups of tax laws for retaining employees, just simply retaining them. And so those are called the employer retention tax credits. And certainly those combine with R&D tax credits. And hopefully for a lot of small businesses that are listening, maybe they’re not taking advantage of it today, but the nice thing is the government here allows you to go back three to four years and fix tax returns and take advantage of things that maybe were missed in the previous years.

Our mission is to ensure that every small business owner, even startups with zero revenue, takes advantage of tax benefits, such as refundable payroll taxes and R&D tax credits, contributing to their growth. Click To Tweet

Okay, that’s very interesting. So we talked about the real estate cost segregation. We talked about the energy efficiency. So how does the energy efficiency tax credit work? Can you give me an example?

Sure. Well, the way that works is if we have a client that has a building and he builds it energy efficient or retrofits it to be more energy efficient, the tax benefit here is $1.80 per square foot. So, if you make the building energy efficient in lighting, in heating and cooling, in the insulation of the building as well. Those three activities qualify up to $1.80 per square foot. And, you know, depending on how the, so say we have a $10,000 building and they made the building energy efficient, that could be up to $18,000 in tax incentives for making the building energy efficient.

Now, on the federal side, there’s also state matching, local, and also utility incentives as well. So maybe we could get that up to $3 a square foot. But either way, that’s a big return, right? Because it’s expensive to make your building more energy efficient. It costs money to have more energy efficient heating and cooling and lighting and more insulation in the building. But we reward that activity so that your payback on investing in that activity is much quicker.

So, what would be the payback? So, you know, I don’t know how up to date my information is, but it used to be that these kind of investments just on a market basis would take 15 years to pay back. With these tax credits, what would you say? Is it like five-year payback or what would that look like?

Great question, because typically before this tax code, you know, we would see the payback to be 10 to 15 years. Now with the tax benefits, we’re seeing the paybacks at three years and under, which makes it obviously for us, you know, here in the United States, much more affordable to invest in making your buildings more energy efficient. Now, we wanted that activity, right, as a country. We wanted to take more energy off our grid and make sure that our consumption went down.

And we’ll clearly continue to see that, you know, going forward under the new administration where they’re talking about making this tax benefit up to $3 a square foot. So, changing the benefit that’s on the table through the infrastructure bill, obviously that would bring the payback down even further. But certainly the administration is pushing to make these benefits higher. And tax law changes all the time. Tax code changes all the time. So we will see. But there’s a big focus on more energy efficiency with this administration. And so I think we could see more benefits in this area.

Okay, that’s very interesting. So is there anything else? Energy efficiency, real estate, cost segregation, we talked about the R&D tax credits, any other major buckets?

The last one is really the work opportunity tax credits. So these are very big tax credits for hiring employees here in the country that are disabled or veterans or have a low income base wage. So we certainly have big tax credits associated with that type of activity for hiring people that are in distressed situations for either of those circumstances, disabled, veterans, Indians, minorities, things of that nature.

So, you know, we typically will work with the accounting firm and the client to go through when we’re seeing on the R&D tax credit, what are the opportunities. We’re also evaluating that for the retention credits, right, that we passed in the, you know, the stimulus bills last year. And then we’re also looking at, are these employees also qualified for work opportunity tax credits as well?

So what kind of an opportunity is that in terms of percentage? So I hire minorities, I hire veterans, I hire disabled people, I pay them maybe $500,000 a year. How much would be possible to be reclaimed through a credit?

Up to about $18,000 of their annual wages can be reclaimed. So, it can be significant, right? I mean, if you have someone on your payroll for $30,000 a year, up to $18,000 of that can be reclaimed. So, it can be significant.

I mean, I’m just giving an extreme example. If I paid someone thirty thousand dollars a year, could I reclaim eighty thousand of that?

Very likely based on employment, retention credits, the work opportunity tax credits. I think that a lot of companies can get up to eighteen thousand now. Some states have matching incentives, so maybe we can get slightly over that as well.

It’s amazing. That’s a huge opportunity. It means that we can hire people at much lower cost than I would have thought.

And that’s why we have those credits, right, to help with disabled people, veteran people, people that are Native Indians and minorities, to have job creation for them in this country.

That’s awesome. That’s great. So, what kind of reports are you doing and research? What does that look like? Someone hires you, let’s say they want to have, maybe they want to have multiple of these. They have a couple of real estate investments. They want to take advantage of the R&D techs credit. Maybe they have some considering energy efficiency. They hire you. What does the timeline look like? Does it take like months to create these research, technical reports? Give me an example of a process.

I’m happy to do that. Listen, when we are referred to a client through their accounting firm, we basically get them a request information document. And once we have the information, the information about the building or the energy components of the building or their employees labor in some of the research activities, we do a benefit analysis that typically takes 48 hours. And that determines at no cost what the tax credits and tax incentives can amount to, what we estimate the tax benefits to be. And if that looks good and they want to move forward and their accounts feel like it’s a worthwhile activity, we typically take 30 days to get the reports done and then their accounts would file that. And maybe that takes another 30 to 60 days to see refunds.

That’s very rapid. So you also talk on your website about tax controversy services. I was curious, how do these work? What kind of tax controversies there are and what do you do to alleviate those?

Sure, I mean, you know, obviously our CPA firms, our accounting firms will have clients that get audited from the IRS. Most of our team here of tax attorneys are former IRS agents as well. And we help them navigate with their clients the audit process with the IRS to make sure we have a great outcome for the client. And it can be a very daunting or scary experience when the IRS knocks on your door, but certainly sometimes it’s just a misunderstanding, sometimes there’s confusion. It’s really about talking to them, you know, in a very professional manner, a very friendly manner about the situation, what they’re uncovering, and then walking through those things to justify how those tax benefits were taken and ultimately have a great outcome for all parties involved.

Ok, well, that sounds definitely sounds very intriguing. I think a lot of our listeners will be interested to save 20%, 30%, 40% on their investments, on their labor, very exciting. So if people would like more information, how can they get in touch with you? How can they find out more and maybe talk to your people? Where can you be found on the internet?

Sure, so we can be found at www.engineeredtaxservices.com.

Ok, all right, that’s it. And you have a LinkedIn page, obviously. Are you on any other social media?

Well, definitely our company is on all social media platforms, engineer tax services. So we’re on Facebook, we’re on Twitter and LinkedIn as well. So we invite you to go to our website or our social media platforms. We try to put out daily tips for you or business and your accountants to benefit from true education.

Okay, that’s very intriguing information. Julio, it was great to have you on the show. Thanks for coming and sharing this valuable information. And to you, dear listeners, if you enjoyed the show, please subscribe and rate and review our show on Apple Podcasts or wherever you are listening to your podcast. And stay tuned, because next week I’ll have another exciting entrepreneur come on the show. Have a good day.

 

Important Links:

This entry was posted in . Bookmark the permalink.