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Ep008: Engineered Solutions with Julio Gonzalez - Transcript

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Dave: Hi Julio.

Julio: Oh hey.

Dave: Well, thank you for joining me today on the IC-DISC show.

Julio: I'm looking forward to it.

Dave: So well, let's get started. so let me just give you a little quick intro. So Julio Gonzalez is the CEO of Engineered Tax Services located in West Palm beach, Florida. And so rather than just reading some long boring bio, I thought I would just ask you some questions. So why don't we just talk about your background? I don't know if I knew, where you grew up, I know where you went to college, but where did you grow up?

Julio: I grew up in Miami, in a very Latino community and a community where three generations live in a household and it's a wonderful culture and community to grow up in. And so it was a wonderful ... I live in Palm beach now, so I'm not too far from where I grew up in Miami and that's still just a great and charming community down here.

Dave: That is awesome. But what prompted you to want to leave the warm balmy climate and go to Colorado for college?

Julio: I think when you grow up in the Hispanic community in Miami, you don't know anything about the country, you just don't know anything really about outside of your own little world. And I just wanted to explore and I wanted to see other parts of the country, and I felt that Colorado was about as far away as I could go. And so I just want to take advantage of that and see snow and see the country and get a chance to be exposed to different cultures.

Dave: Oh, that is great. And then while you're there, I believe you studied engineering, is that correct?

Julio: Engineering and tax as well.

Dave: Okay. So that's probably a perfect background for what you do now.

Julio: I think so. I mean, we have a niche, we're a licensed engineering firm. We do federal and state tax work, but all the tax work we do is really associated with engineering based sciences and medical and doctor research and R&D. So yeah, we have this unique niche of scientists, engineers, and tax professionals.

Dave: That's great. And I look forward to going into that in a bit more detail. So when did you get into this business? Was it right out of college or when you started the firm? Tell me about that.

Julio: Yeah, I think I went to one of the big accounting firms after college. And at that time, this was back in the 80s, there were more and more tax law associated with engineering specifically with real estate and how we write off and depreciate buildings and how we do research and development tax credits here in the United States. So, yeah, it was a niche where there wasn't a lot of competition within a big firm. So I went down that path and it kind of just took off and evolved from there.

Dave: Okay. And then what year did you start Engineered Tax services? You are the founder, correct?

Julio: I'm the founder. So this company started ... I started in 2001 and that means I'm getting old, right?

Dave: Well, we're all getting old, Julio. So 2001, so nearly two decades, you've been doing this?

Julio: Yeah. Nearly two decades and it's been a tremendous ride from being one person to over 100 people and and evolving, and really the goal was to bring these types of tax benefits to mainstream United States. So it's been a wonderful ride.

Dave: That is awesome. So when you first got started, what was your primary service then? Was it a cost Seg?

Julio: It's cost segregation because, David cost segregation was always available to the Fortune 500 public companies so the blow was back then the big eight accounting firms. And beyond that, no one else had access to our knowledge and we didn't really have the internet back then. So there wasn't much information about it, but cost segregation is the ability to determine what from a building is structural versus non-structural that's giving us the ability to write off the non-structural components of the building immediately. And obviously that's a big advantage for many businesses, but no businesses had access to that two decades ago. It was only the Fortune 500 companies. And obviously, back then CPA firms, weren't going to have an engineering department to satisfy a few clients.

And so, the goal really was to make this mainstream USA by providing that partnership to CPA firms so that they can have someone in the engineering science that can help the clients with buildings and better depreciation structures. And I think that's what we set off to do in 2001.

Dave: That is great. And since then, not only have you grown over 100 employees, but I believe you have more than a dozen different services now, don't you?

Julio: We do. I mean, the core one really is cost segregation, which we work with the CPA firms and their clients to go back on buildings their clients have owned or buildings that they're purchasing or building. And basically again, giving the IRS a detailed engineering study that shows what parts of the building are non-structural that really don't have a 39, 40 year life as most parts of the building are depreciated.

So depreciation for buildings is either between 30 to 40 years here in the United States. And, it's great because real estate is one of those few investments that you actually get to expense or write off. However, it's over a slow period of time. And basically cost segregation came about because Fortune 500 companies were complaining that writing off a building over 40 years was not ... it didn't match up with the timing because a lot of the components of the buildings were wearing out much sooner than that, and they were replacing a lot of components much sooner. And so they sued the IRS and they won in tax court. And ultimately the IRS came out with a methodology to have engineers that are experts in building construction determine what is, non-structural, what exhausts much quicker. So that the timing that's much better. And that's how it all started.

Dave: Yeah. And as I understand, really hit a bottom line what cost segregation does is it really just lets accompany accelerate that depreciation. And so with bonus and other accelerated appreciation, they basically is it correct that they ended up being able to really write off the majority of the building, almost immediately upon purchasing it. Is that correct?

Julio: Yeah. I think on average probably about 50% of the building can be expensed immediately now through our current tax laws. And it does apply to people that have owned buildings and chose to go over depreciation using the traditional methods. So they can change that one time and change to a cost segregation based depreciation method. But you're right. I mean, it writes off a lot of the building quickly, which is great for wealth preservation or preserving cash and for investing in a company. So it's a big deal.

Dave: Yeah, no, I've got clients who've benefited from that. So, besides the cost segregation is there a second service that's also kind of ... that we might want to talk about? It appears that the research and development tax credit might be another one of the significant services you offer.

Julio: Yes. So, our core second business is research and development tax credits. I think one of the most important credits in our country because it's a credit to help keep jobs and create jobs here in the United States. And really what it is, is a refund on labor for any labor done with the US employments that is involved in innovation and innovation of a product, a service, a widget, can be growing agriculture. It could be technology, but anyway, if we have that US labor working on the improvements, research and development of those core assets, we have an R&D tax credit that helps refund some of that labor. There's states that match some of that refund as well. And why is that important? Because it's hard to compete many of the companies here in the United States with technology in India or China at much lower labor rates.

So to be competitive, we've created the research and development tax credit, and we have scientists and engineers. We go into the companies with their CPA blessing and basically determine what are the labor associated with innovation. And for this company, we make sure they get that payroll refunded and hopefully get some stay refunds as well, so that we can keep jobs here in the United States. We don't have to continue to outsource those jobs overseas, where the labor is cheaper. And, so I think one of the most important tax credits and ... We're grateful to be a resource to the country with being that partner to the CPAs and making sure that they have the information, they have the knowledge so they can make sure their clients are getting these benefits.

Dave: Yeah, no, I know of CPA firms that have used your services and they say it's been a very positive experience. So let's kind of drill down a little bit. So what are the types of companies who most benefit from your work in terms of revenue size, employee size, industry, any other characteristics, just try to help give us a sense of ... I know you'd said that you help bring this to companies other than the fortune 500. But obviously a company that's some guy, working out of the trunk of his car selling baseball caps. It's probably too small, but what's kind of the minimum sized company ... that size that it makes sense for you all to take a look at?

Julio: Yeah, David, that's a good question. I think that we are the resource to CPA firms and in cost segregation we're doing studies for stadiums, high rises, we're doing it for their client, that's a doctor and has a small build out within his building or a company that has a computer store in half a million dollar building. So I think where it starts to make sense on the cost segregation side is when you have over a half million dollars in either building renovations improvements or actual building costs. And at that point, I think the cost versus the benefit makes sense. But again, we start at that level and go all the way up to a billion dollar stadiums. So there's a wide range there.

On the R&D tax credit, we're so fortunate because before you had to have really a company that was paying in taxes to get the tax credits, returned the tax credits. But a couple of years ago, the government extended the lawmakers, extended R&D tax credits to a refund payroll taxes. So now, we're doing research and development tax credits for startups that are in that incubation stage. And they're not paying in taxes yet, but they're paying payroll taxes and can offset their payroll taxes.

So yeah, we start there, but we work our way up to big pharmaceutical companies that have millions of dollars in R&D spend, agricultural companies that have millions of dollars in R&D spend, a local manufacturer that's just making a widget. So in both areas, there's kind of a wide range. We do what we can for the CPA firms and their clients, and hopefully, bring value to a wide range of companies here in the United States.

Dave: That makes sense. So, just to be clear, you're not so much focused on specific companies or industries and specific sizes, rather you're focused on being a resource for the CPA firms that have entrusted you to assist them in that if the CPA firm believes it's worth looking at for the client you're willing to take a look at, is that right? Really? That no client's too small if a CPA firm partner of yours wants you to look at it?

Julio: I think that's true. I've learned over the years, David that, we may take on projects that aren't profitable, but it's important to the CPA firm. It's important to the client. And I think that always comes back tenfold in terms of return. Whether it's the CPA, keeping you in the fold for other projects or that client actually, referring you to someone else. I think that goodwill always comes back in terms of return on investment. So we do work with firms across the spectrum. Not all of them to make sense from a profit standpoint, but from a capital standpoint, social capital, I think it does make sense.

Dave: Sure. No, I get it. Let me just drill down just a bit further. So like for the cost segregation, could we maybe just talk about a specific example, maybe a client you've recently worked on that you could discuss anonymously, to just kind of give an illustration of like what the impact could be of a cost segregation study?

Julio: Yeah, I think, in terms of an example, we just finished a hotel project. That hotel was one of those traditional hotels you would see and stay in if you're a business traveler, moderate priced hotel. But they, spent four million in building the hotel, obviously under a traditional depreciation, they would take that four million and, expense it or depreciate over a 40 year period. So they would take a little bit every month, a couple of 100,000 every year. And that would be used to offset their taxes.

Under the study we qualified of that four million, 1.8 million of non-structural expenses that could be immediately expensed. So, for them, instead of taking a little bit over a long period of time, we were able to take 1.8 million, which was obviously helpful for them. And in terms of lowering their tax liabilities, preserving their wealth and being able to use that cash to invest in other hotels and in employment. And so I think for us, it was important, for them, it was important. And yeah, I love what we do, which is keeping jobs here in the United States and helping companies invest in themselves.

Dave: Oh, that's awesome. Well, let me make sure I that I understand the numbers here. So if it was $4 million building, let's say for easy math, they could have depreciate over 40 years. So that would have been, I believe, $100,000 per year that they would have had a depreciation. So that first year they would have had roughly 100,000, but instead they had 18 times that with the 1.8 million you mentioned, is that right? Is that the jest of it?

Julio: That's the perfect math.

Dave: Okay. And then you mentioned the nonstructural things. So what would be the things that would make that ... what would be some of the components?

Julio: When we do a study, so on cost segregation, what would be some of the non-structural components.

Dave: Like HVAC?

Julio: That would be ... what's that?

Dave: Like HVAC?

Julio: Like HVAC. Sure. All the finishes, all the finance, all the land improvements, all the landscaping, the pools in the hotel, flooring, some of the fixtures, the plumbing associated with the fixtures in the restaurant.

Dave: I see.

Julio: Executive finishes. So there's a lot and it adds up quickly and it's much better to expense that upfront versus, taking so long to write it off for a lot of reasons.

Dave: Sure.

Julio: One because they don't last 40 years, but two, obviously for net income and tax liability purposes.

Dave: Yeah. No, that makes sense. So that's a good example there. And now, so I think that's really helpful. I think, most people could follow that. What are some of the biggest misconceptions around the cost segregation studies? Because I'm sure people have misunderstandings.

Julio: Oh yeah. I think the biggest one has always been, will I be audited? Will it trigger an audit? Will this create any issues with the IRS? It sounds too good to be true. Those are always the main issues. I think the main misconceptions, the main concern, but obviously, fortunately this is tax law and the IRS has issued guidance on it, and we have really the blueprint for what the IRS looks at when they're reviewing these projects. And as long as you follow the blueprint for what the IRS wants done, the reviews go well. And we don't see that big of an audit rate. In fact, the audit rate we see is very minimal because I think the agents are quickly looking through to see if they have everything they're revealing, what the IRS requires for that. And as long as that all matches them, things go well.

We have a few audits from time to time that tend to be on much larger projects. And, we typically at that point get with the engineers at the IRS reveal it, typically there's no changes. And so, as long as you're following the rules, right, David? With the IRS there's no issues.

Dave: It's true.

Julio: I guess the question comes, what if you work with a provider that has an experience, doesn't have the engineering licenses and then you can run into problems.

So you want to make sure and the CPAs want to make sure that they're working with a provider and they've done their due diligence because that's where the problems come in. That's why you see audits. That's why you see court cases where people have lost is because they're getting with providers that are not experts, that really have kind of just jumped in to make a quick profit.

Julio: You see that in any business, right, David? But-

Dave: Sure.

Julio: ... it's so important when you're dealing with the IRS that you make sure those CPA firms are doing their due diligence on firms like us to make sure they have the licenses, have the experience, have the professionals. And for CPA firms, that client is their annuity. And we understand that. And we understand if we do anything to mess up that annuity for them, that could be 30 years of revenue loss, right?

Dave: True.

Julio: So that's real important that we understand customer service. We understand ultimately that we're representative that CPA firm. We have to do our best job to make sure we do that well.

Dave: Mm-hmm (affirmative). No, I can certainly appreciate that. That's our perspective and attitude as well. Well, let's turn to the research and development tax credit now. Kind of the similar questions, let's get into a little bit of detail and maybe, let's look at an example that might be easier to understand it. And then let's talk about some of the misconceptions around R&D because it's not just a scientists and white lab coats. I understand. Is that right? That covers more than just what you think of as just like pure scientific R&D in a lab setting. Is that right?

Julio: I think so. I mean, I think people think of R&D of lab coats, certainly. And then obviously it does include the lab coats, but it includes agriculture. It includes technology. So a lot of tech firms that are making apps, tech firms that are doing software. So it obviously ... it's the local manufacturer making any type of widget as well. And so it's a wide spectrum across the United States, it's architects and engineers that are designing buildings to new standards, new hurricane standards, to new earthquake standards, to new fire standards. So anything that we do in the United States that we're have to improve on whether that's a service or a product or a drug or some type of a tool and die.

So again, a wide spectrum, it's good just to make sure that if you have employees that are doing something that's new to that company, and they're figuring out the processes and procedures and coming up with new and innovative ways that they're getting that refund to labor. Because what I hear all the time, David, is that the firms would have this R& D tax credit can't compete nationally, globally with Indias of the world Chinas of the world, where people can go off and have these products or services made over there for much lower labor costs.

So this helps our local companies, our companies here in the United States, our employees in the United States compete at a better level. And so I think it's one of the most important credits we have. We've had it for over 30 years and the Congress, the lawmakers in DC continue to support it. You know, hopefully we can make it even stronger. We're not as competitive that's countries like Ireland or Australia or Canada where their R&D tax credit is much higher. So we do have that risk and exposure, and certainly the bigger companies can take advantage of the arbitrage on the R&D tax credit rates over there.

So, I continued to go up to DC all the time, David, to make sure the lawmakers know what's going on in the industry, make sure that they understand that we're at risk to losing these jobs and that it is, money that goes away from the treasury, right? And goes into these companies.

Dave: Mm-hmm (affirmative).

Julio: But ultimately that investment comes back in terms of payroll tax and labor tax. And hopefully that's a good investment.

Dave: True.

Julio: So, we have to think of it as a good investment or do we want to lose these jobs overseas.

Dave: Yeah, no, I understand. Well, let's look at an example and maybe let's pick one that would seem not as obvious to the casual observer, like you may be a manufacturing or sort of a blue collar type industry where the average person on the street would say what, that's not research and development. There's no light lab coats. could you think of a recent example you've done, that's more of like a blue collar type industry that you could kind of share the details on?

Julio: Sure. We have a local manufacturer here in Florida that makes bras and underwear and manufacturers those products here in the United States. They're the last company that makes bras and underwear is in the United States. Most of that has gone overseas to China, and they continue to make higher end undergarments here in the United States using US labor and without the R&D tax credits, they simply couldn't compete any longer.

And it's become more and more difficult to compete with the overseas labor, but the R&D tax credits help us keep their prices in a range that they can continue to sell here in the United States and prosper. So, that's a local-

Dave: True.

Julio: ... one, but that's one of the last remaining companies in the United States that's been able to stay here with these credits.

Dave: Sure. Sure. No, I appreciate that. Well, I'm wondering now if maybe we could kind of ... maybe on another company that would be ... it would have more anonymity where there might be hundreds or thousands in their industry that we could actually maybe drill into the numbers on one, like maybe the ... roughly the size of the company employees and what the process entailed. And then maybe what kind of accredited ended up with does a study come to mind off the top of your head that you can recall the numbers, or is there something that you might have at your fingertips we could look at?

Julio: Yeah, I mean, we generate, close to two billion a month and R&D tax credits for our clients.

Dave: Oh, wow.

Julio: So it's obviously pretty significant, we recently had a software company that does software associated with payroll and we generated roughly $15 million in tax credits for them annually. Of course their software development is specific to payroll and other, payroll related services associated with, companies here in the United States. They do that software innovation here in the United States with US labor. And obviously that's a public company with thousands of employees and thousands of offices across the country. But for them, that R&D tax credit is the difference between us losing thousands of jobs overseas to development of software likely in India and those jobs here. And that's significant, but we see a lot of that.

So we have the small manufacturer, we have the large software developer, we have large pharmaceutical companies averaging 20 to 30 million in R&D tax credits. We just did a $5 million tax credit for a perfume maker here in New Jersey. But I can also think of a R&D tax credit, we had just done a couple of million for a manufacturing firm in New Jersey that makes chips out of popcorn. And, so-

Dave: wow.

Julio: ... it's great to see all these companies doing well that taking advantage of this R&D tax credits. So to continue to keep these jobs here.

Dave: Yeah. And so if you're generating credits of, more than a billion dollars per month, I'm guessing that's what thousands of projects or tens of thousands or hundreds, what would be kind of a typical month for how many projects you do?

Julio: Yeah, probably a few hundred projects a month.

Dave: That's awesome. That is awesome. Okay. Well, that is good. What are some unique things about ETS that differentiates it from other firms in the space? I mean, you kind of touched on it, but I'd like to give you just a little more of an opportunity to go into detail. So what are some of the things that really make you unique in the industry?

Julio: Well, I think one thing that makes us the most unique is we're actually the only firm that's a licensed engineering firm. So yeah, that's important because we have to live to the standards of being licensed in the United States, by the federal government. So I think that that's the bar, the standard high, and we have to live to those high standards for being licensed. And I think secondly is we've probably done the most. We've been here the longest, we've done the most projects. We have the most experience with the IRS.

And, I think that speaks well for who we are and our background and we have licensed engineers on staff, licensed CPAs, licensed tax attorneys. And again, we don't take over for the CPA. We only come in and do these reports with the CPA and with the client.

Dave: Sure.

Julio: So again, we're just that resource for them, but I think all those things make us a real unique, niche company here in the country for cost segregation and research and development tax credits. There's other firms out there. And, they're all great peers of ours, so it just comes down to the due diligence, pricing is always a big thing. We try to be price competitive. We compete against the big four, of course. And, we try to say about 50% of their pricing to remain competitive out there. So I would say those are some of the unique differences.

Dave: That is very helpful. And I especially appreciate you mentioning that you're the only license engineering firm in this space to me that would speak volumes, is a differentiator. So what I'd like to do now, we have just a few minutes left. I'd like to just talk about some of the other services you have. And again, don't, don't just like rattle off all of them in 10 seconds, but, let's talk about one or two other services that are either particularly timely or that you have a unique enthusiasm around and maybe even as many as three or four if time allows. So what comes to mind besides R&D and the cost segregation that you're excited about?

Julio: Yeah. So one of our other big services is energy tax services. So, when people make buildings energy efficient, or retrofit buildings energy, there's a lot of federal and state and local incentives associated with making a building energy efficient. And we measure that energy efficiency for those building owners to make sure that they take advantage of those federal tax benefits. A lot of people aren't aware of them, sometimes they take the local benefits, they don't take the federal benefits.

And, so that's one of the big services that we deal with, David. We also work with opportunity zones, which is new out of the 2017 tax reform Act and opportunity zones is basically a tax benefit incentivized businesses and real estate moving into areas that need revitalization. And, so we're heavily involved in helping our businesses take advantage of the opportunity zones and structuring those tax benefits in the right way.

So I think that was a big part of the new tax benefits that came out of tax reform as well. And of course we deal with everything you can think about related with taxes and buildings. So historic tax credits, when we're taking a building that's over 50 years in age here in the United States in a perhaps bad neighborhood, but needs revitalization. We can help them get 30% to 40% of those costs and revitalizing the building back in terms of tax credits, which they can ultimately sell.

And, so I would say of the things we're most involved in and the other services, I would say those are at the very top.

Dave: Yeah. That is exciting. And like on the opportunity zones, again, I like, kind of real life examples. Can you think of an example for a project you've done this year around the opportunity zones, you may be because they're typically in like a economically depressed area, is that right?

Julio: Yeah. So economically depressed area. So, we did a building in St. Louis that was built in 1899 and it was a old shoelace manufacturing company that hasn't manufactured shoelaces since the early 90s. And so the building was 50,000 square feet have become vacant and, really wasn't an economically distressed area, and just needing that extra good tax law to bring capital to it and bring back jobs to that community.

So that building was an opportunity zone and also was historic. So that money finally came in because of the tax codes and, 50,000 square feet of now renovated building that's beautiful. And now tech companies are moving in there because they're also events of being a tech startup in an opportunity zone. So now we see a building that's again, brilliant from despair to brilliant. And now we see, so many jobs and so many companies moving into that building because it's in an opportunity zone.

And why is that important? Because if I go into an opportunity zone and my company does well, then I have a tax advantage because I don't have to pay capital gains after a 10-year period, whether it's the building or the real estate.

Dave: Wow.

Julio: So that's a tremendous example that, David, I see all these examples every day of capital going into these distressed areas because of this new tax laws, new companies taking advantage of it. And these are areas that probably would just be dormant for many, many, many years, and have been. But now we're saying that, good tax law, good tax code and good idea can actually, bring significant jobs and revitalization to communities.

Dave: Well, that is awesome. And thank you for pointing out something that didn't click at first, but that you could have a project that could utilize, a number of your services. Like you mentioned this one, it qualified for both opportunities and the historic tax credits. But I suppose as you're putting in new lighting and stuff, there might've even been some energy tax, credits available as well.

Julio: And there was cost segregation riding off the building renovations and there was R&D for all these tech companies moving into the building.

Dave: Wow, what a great day going?

Julio: David, we try to be the Robin Hood. We try to give back to these small companies and these distressed communities and make sure that the money is staying there for expansion and jobs and renovation, and hopefully all this good tax law is working.

Dave: That is awesome. Well, I can't believe how fast the time has, has flown by. So if it's okay with you, why don't I just take a minute to just see if I can recap the call. I've been making notes here, to just have kind of a summary. So, your firm's nearly two decades old and, one of your key differentiation items is that you're the only licensed engineering firm in this space. You don't really think in terms of minimum sized clients. You think more in terms of the relationships with your CPA firm partners, that if it's a project they're interested in, it's a project you're interested in. Some projects because of how small they are, may not be especially financially attractive. You look at it kind of from a bigger picture that the value of the entire relationship, with the CPA firm. Even though you've got a bunch of different services, the one thing they have all have in common is a need for an engineering component. And, the projects you have will oftentimes be able to use multiple services across your portfolio. Did I do okay at summarizing that or what did I leave out?

Julio: I thought that was perfect. Really, really well done.

Dave: Okay. Well, so let's say somebody is listening to this podcast and they want to learn more explore this. So what would you suggest they do as a next step? Is there a particular place on the website web you want to send them? Do you want them to reach out to you or one of your colleagues and just by phone or email, what would your preference be?

Julio: Yeah, please go to our website. I think there's a lot of great video and educational content that can help you, learn more about these tax benefits for you, your CPA and clients that can take advantage of that. And we're at, and, everything that you could think about that we do is on there from an educational standpoint, you also can, contact us directly from our website.

Dave: That is great. And what is the main phone number just in case they don't make it to the website?

Julio: Sure. Our main phone number is (561) 253-6640. And we always appreciate your calls and consideration. And again, we're here first and foremost as an educational resource.

Dave: That is awesome. Well, Julio, well, thank you so much for making time in your busy schedule to be on the IC-DISC Show. I learned a really, a lot about not only your firm, but really these engineering based services altogether. And I suspect you've done a great job of educating our listeners as well. So thank you very much and keep up the good work.

Julio: Well, thank you for having us. We appreciate all you do out there in the tax world as well. And hopefully you and I are helping companies and people make a difference here in the country and, appreciate what you do as well.

Dave: All right, my pleasure. Thanks again, Julio. Have great day.

Julio: Okay. Thanks. Bye.