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Dear subscribers,

Whether you’re a creator, business owner, or employee - you’re probably leaving thousands of dollars on the table if you haven’t studied the tax code closely. 

Ankur Nagpal is the founder of Ocho, a platform that helps creators and business owners build wealth. Previously, he co-founded and sold Teachable for $250M. 

I spoke to Ankur just in time for tax season about:

1. How employees can keep more of what they earn

2. His top 3 tips for creators and business owners to build wealth

3. How to get educated and hire the right financial help

None of what follows is financial advice.

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How employees can keep more of what they earn

Welcome Ankur! Can you start by sharing some advice on how employees can build wealth on W2 income?

Unfortunately, W2 is the worst type of income to keep more of what you earn. 

The tax code is written to encourage activities that the government wants you to do. In the US, starting a business and investing in real estate are two of those activities.

That being said, here are some things that you can do to optimize your W2 income:

1. Don’t sit on too much cash. Cash loses value over the long-term.

2. Use Roth accounts. You can withdraw tax-free from these accounts at retirement.

3. Max out your 401K match. This is free money from your company.

You mentioned real estate - how can you use that to reduce your taxes?

Real estate depreciation lets you deduct part of the cost of your investment property from your income. Here’s how it works:

1. Buy an investment property that produces rental income.

2. Do a cost segregation study to divide the property into parts (e.g., roof, NVAC) with different lifespans.

3. Deduct 80% of the cost of any part that lasts 15 years or less from your income.

So for example, if you buy an investment property for $1M, you might be able to use the strategy above to get a tax deduction of $250K+ right way.

There’s one catch - you can only deduct the $250K+ from passive income sources like rentals unless you or your spouse are real estate professionals.

It’s complicated, but this shows the power of what you can do with the US tax code.

Wow. Maybe the government should fix some of these loopholes.

Yes, sometimes, when I share this information, people ask: “Why don’t you just pay your taxes?” And I’m like, look, all the wealthy people already know this stuff. They already have accountants doing this. 

So we may as well democratize this information and talk about it more openly.

How creators and business owners can build wealth

Why did you decide to start Ocho to help creators and business owners build wealth?

When I sold Teachable, I spent a lot of money hiring lawyers and consultants to help me structure my money, estate, and taxes. As an immigrant, it blew my mind how complicated the tax code was and how many loopholes there were for creators and business owners.

Talking to other folks made me realize that they struggled with the same thing. So I want to help them keep more of what they earn.

What are your top 3 tips for creators and business owners to build wealth?

Great question. Here’s what I recommend:

1. Get your incorporation right. If you make $100K+ a year in your lifestyle business, set up a S-corp instead of an LLC to save thousands in taxes. If you’re a startup founder, set up a C-corp and qualify it as a small business stock. This will let you get tax-free gains up to $10M if you sell the company.

2. Deduct your business expenses. Many people don’t realize how much tax they can deduct with their business expenses. For example, if you have a home office, you can deduct a percentage of your rent or mortgage from your income.

3. Set up your own benefits. A solo 401k is arguably the most powerful retirement account out there. You can invest it in stocks and other assets and get up to $66K tax deduction. That’s why our first product at Ocho is a solo 401k.

Let’s talk more about incorporation. Can you explain more what an S-corp is and why it’s better for tax savings than an LLC?

When you have an LLC or are unincorporated, all the income you make as a creator is subject to self-employment taxes. With an S-corp, you can split out your income as business owner and employee income. For example, if you made $100K this year, you can claim $50K as your employee salary and $50K as business profit.

Since you only pay self-employment tax on your salary, you likely be able to save $5K in taxes on $100K income by using an S-corp. This is something that a lot of people don’t know about, but it produces thousands of dollars in tax savings upfront.

Can the business owner set their own salary range?

Yes, but it has to be somewhat defensible to the IRS. You can’t be like “I’m gonna pay myself $1K a year on $100K+ income.” It has to be reasonable like $50-60K.

Great, now let’s talk about business expenses. What are some expenses that a business owner can deduct from tax?

Business expenses include:

1. Home office expenses (e.g., portion of rent, mortgage, and utilities)

2. Work related travel expenses (e.g., airfare, hotel, care rental)

3. Work related car usage (e.g., standard mileage rate)

4. Business meals

5. Education expenses

The list goes on.

How can a business owner use credit cards to get more value out of these expenses?

I use Chase Sapphire Reserve and AMEX Platinum cards because I love to travel.

My biggest advice for using these cards is to never redeem points on the rewards website. Instead, you should transfer these points out to an airline. For example, I recently used 50K points to fly business class from Argentina. That’s $500 worth of points vs. $6,000+ if I bought the ticket.

Will this work if a business has multiple owners?

If your startup has multiple owners, it’s better to use a business credit card. It’s unfair to your employees and other owners if you’re racking up points on Chase by yourself. 

Ok let’s talk more about your third tip - what’s a solo 401k and why is it so powerful?

I think the solo 401k is the best retirement account in America for three reasons:

1. High limit. You can contribute $66K / year and deduct tax on the full amount.

2. Roth option. You can choose a Roth solo 401k and pay no taxes on withdrawals.

3. Investment choice. You can invest in anything you want, from stocks to startups.

With a solo 401k, are all your gains tax-free?

I’m splitting my solo 401k into pre-tax and Roth accounts to mix and match. Last year, I contributed $20K to my solo Roth and $20K to my solo pre-tax accounts.

Can corporate 401Ks be rolled over to a solo 401K?

Yes, they can!

Where can someone set up a solo 401k?

Major brokerages like Fidelity, Schwab, and Vanguard all offer solo 401k. But to be honest, I found every single provider to be subpar. That’s why we decided to make solo 401k our first product at Ocho.

We’ve onboarded a couple hundred customers and are about to roll out investing. It’s been a fun journey.

How to get educated and hire the right help

Where can people learn more about building wealth?

You can find more information about these topics online but it takes a lot of work.

At Ocho, we have a free learning section and a paid education product in Ocho Money. It's a membership site where we offer courses and training.

Our vision is to integrate education and technology to create a seamless user experience to help you build wealth. 

Are most of your customers creators?

We use the term "business owners." Many of them are creators, but many are also freelancers, consultants, and old-school business owners. If you have any kind of business or side hustle, you're the target audience.

How can people hire better professional help? How can you find out if your accountant or financial planner is good?

I think the most effective way is to ask other successful creators and business owners for referrals. I’ve probably recommended accountants to people at least 10x in the past two weeks because it’s tax season.

Creators and business owners can also greatly benefit from discussing money matters with each other.

Thanks so much Ankur for your advice! I honestly think this conversation will save people thousands of dollars. 

If you enjoyed this interview, follow Ankur on Twitter and check out Ocho to set up your solo 401k and learn more about these topics.