TrueBooks CPA

What Most CPAs Do vs What Real Tax Strategy Includes Most people think they have a tax strategy. What they actually have is tax preparation. A traditional CPA relationship usually looks like this: • Meet once per year • Send documents • File the return • Review what already happened That’s compliance. And compliance is necessary, but it’s not a strategy. Real tax strategy happens throughout the year. It includes: • Ongoing income projections • Timing of income and deductions • Entity structure decisions • Real estate positioning • Estimated tax alignment Preparation reports the outcome. Strategy influences the outcome. If the only time you’re discussing taxes is during filing season, you’re operating reactively. At TrueBooks, our focus is on building systems that allow for decisions to be made during the year, not only after it ends.

We had a client come to us after years of doing everything "right." Filed on time. Worked with a CPA. Kept reasonable records. And every single March, they owed more than expected with no clear explanation of why or what to do differently. Nothing was wrong. There just wasn't a plan. We started with a mid-year projection. Looked at their entity structure. Modeled a real estate move before they made it. Set up quarterly check-ins tied to actual performance, not just the calendar. By filing time, there was nothing to react to. The decisions had already been made. Same income level. Different process. Different outcome. Tax strategy isn't a filing exercise. If it only starts when your documents are due, you're already behind.

What Can Still Be Adjusted (and What Can’t) Come Year End Not everything is locked once the year ends, but the options are more limited than most expect. What can still be adjusted: • Retirement contributions (in certain cases) IRA and some SEP contributions can still be made after year-end. • HSA contributions If eligible, these may still be funded before the deadline. • Prior-year elections (limited situations) Some elections can be made with the return, but they are narrow and technical. • Bookkeeping cleanup You can improve accuracy, but not recreate missing support. What generally cannot be changed: • Income already received • Expenses not incurred during the year • Participation levels in real estate • Business structure decisions • Timing-based strategies The key difference: Some items are reported at filing. Others must be executed during the year. Most meaningful tax savings fall into the second category. If you’re relying on filing season to reduce your tax bill, you’re already operating with limited leverage. Our weekly newsletter breaks down how to approach this proactively. Sign up here - https://lnkd.in/gDRKJrdU

What You Can’t Fix at Tax Time... Most people think tax season is when you reduce your tax bill. It’s not. It’s when your tax bill becomes final. By the time you’re filing: The year is over. The income is earned. The decisions are already made. Here are things that typically cannot be fixed at tax time: • Entity structure If your business wasn’t structured properly during the year, you can’t retroactively optimize it. • Real estate positioning Whether a property is passive or non-passive is determined by how it was operated, not how it’s reported. • Estimated tax alignment Underpayments don’t get undone at filing. Penalties are already in motion. • Bookkeeping accuracy You can clean up books, but you can’t recreate missing documentation. • Timing of income and deductions Tax strategy often comes down to when things happen. Once the year closes, that timing is locked. Filing is reporting. Planning is what changes outcomes. If your current approach is focused on filing only, there’s a high likelihood you’re leaving opportunities on the table. You can learn how we approach proactive tax planning here: https://lnkd.in/gn-26D2K

How a High W2 Earner Might Actually Use Real Estate Strategically Let’s walk through a simplified example. Assume a taxpayer earns $650k in W2 income. They purchase a rental property and generate $80,000 in depreciation-driven losses. Many people assume this means their taxable income drops immediately. But the tax code doesn’t work that way. Scenario 1: Passive classification If the property is treated as a passive activity, the $80,000 loss cannot offset W2 income. Instead: • The loss becomes suspended • It carries forward to future years • It may offset future passive income or be released when the property is sold The tax benefit exists, but not immediately. Scenario 2: Non-passive classification If the taxpayer qualifies for a structure where the activity is non-passive (for example, through certain short-term rental structures with material participation), then the same $80,000 loss may reduce current taxable income. In this case: $650,000 W2 income − $80,000 real estate loss = $570,000 taxable income Same property. Same depreciation. Different classification. This is why real estate tax strategy isn’t just about buying property. It’s about how the activity is structured and classified under the tax code. Two investors can buy identical properties and receive completely different tax outcomes. If you're a high W2 earner and are using real estate as part of your tax strategy, understanding the classification rules is critical. You can learn more about properly documenting material participation here: https://lnkd.in/gmbQaan9 Or join our weekly newsletter, where we break down real tax strategy like this every week: https://lnkd.in/gn_iWfjq

When Real Estate Tax Strategy Actually Works for High W2 Earners Many high-income W2 earners hear the same advice online: “Buy rental property and reduce your taxes.” Sometimes that works. Often it doesn’t. The difference comes down to how the losses are classified under the tax code. By default, rental real estate is considered a passive activity. That means rental losses: • Offset passive income • Do not offset W2 income • Are suspended if there is no passive income So for most W2 earners, simply owning rental property does not reduce their current tax bill. But there are situations where it can work. For example: 1. When passive income already exists If you already generate passive income (from other rentals, partnerships, etc.), rental losses may offset that income. 2. When short-term rental rules apply Certain short-term rentals can avoid passive activity classification if material participation requirements are met. This is where many high earners start to see a meaningful tax impact. 3. When real estate professional status applies If a taxpayer qualifies as a real estate professional and materially participates, rental losses may offset ordinary income. This is less common for full-time W2 earners but possible in certain household structures. 4. When depreciation timing is intentional Strategies like cost segregation can accelerate depreciation, increasing deductible losses, but only if the classification rules allow those losses to be used. The key point: Real estate tax strategy isn’t just about owning property. It’s about classification and participation. Without that structure, the deductions exist on paper but don’t reduce current taxes. If you'd like to review how your properties are classified, you can schedule a strategy call here: https://lnkd.in/grDJE5qP Or join our weekly newsletter, where we break down useful tax strategies: https://lnkd.in/gn_iWfjq

Most high-income earners misunderstand material participation. They think: “If I own rental property, I can use the losses.” That’s not how the tax code works. Material participation determines whether your rental losses are passive or active. And that distinction determines whether those losses reduce your W2 or business income. Here’s what actually matters: The IRS has 7 tests for material participation. Most people only qualify under one: The 500-hour test. Meaning: You must materially participate in the activity for more than 500 hours during the year. That’s roughly 10 hours per week. And it must be documented. Not estimated. Not assumed. Documented. There are other tests: • Substantially all participation • More than anyone else involved • 100+ hours and more than any other individual But most high earners with full-time careers struggle to meet them. Owning property does not equal participation. Hiring a property manager makes it harder. And grouping elections complicates it further. Material participation is powerful. But it must be built intentionally, before you assume the losses will offset income. If you’re a high earner and using real estate as part of your tax strategy, this is not something to guess on. You can schedule a strategy call here: https://lnkd.in/grDJE5qP If you want the detailed breakdown of the material participation tests, we’ve created a guide here: https://lnkd.in/gmbQaan9