Calvin: 0:00

Welcome to the Empowering Healthy Business podcast, THE podcast for small business owners. Your host, Cal Wilder, has built and sold businesses of his own and he has helped hundreds of other small businesses. Whether it is improving sales, profitability and cash flow; building a sustainable, scalable and saleable business; reducing your stress level, achieving work life balance, or improving physical and emotional fitness, Cal and his guests are here to help you run a healthier business, and in turn, have a healthier life. Greg, welcome back to the Empowering Healthy Business Podcast. Happy to speak with you again.

Greg: 0:00

Yes. Thanks for having me again.

Calvin: 0:00

So I feel like we've talked about this beneficial ownership reporting requirement a million times, but it seems like this could potentially be the last time. What's new with that?

Greg: 0:01

but otherwise, if you're just, a mom and pop shop, then this is not anything you need to worry about anymore.

Calvin: 0:01

Well, that's good news.

Greg: 0:01

Yes. Calvin: So as we record this, it's April 2nd. So I know Greg, you've got two more weeks here of intense tax filing to do. But I know we wanted to talk about some things that the audience might be interested in now that we're gently moving past the tax deadline into the rest of the year.

Calvin: 0:01

So, what do you want to cover?

Greg: 0:02

Yeah. This is a kind of a time of the year where I get to see maybe made somegood decisions last year and now they're getting ahead of their taxes or they made some bad decisions and they're paying for it now. So, I thought it'd be good to come on here and just have a quick discussion on what, as a business owner, like what you should be doing throughout the year after tax season? Because let's be honest, no one wants to think about taxes at all, and most people only think about it maybe like once, twice a year. But unfortunately, thatcould get you into a little bit of trouble. So,my first point is to know that tax planning, it's a year round sport and, it's something that you should be having conversations with, especially if you're a profitable company. You should be having conversations with your tax accountantthroughout the year, whether that's to just check in. See if there's anything new on their end or, talk to them about things that might be happening through the business. Because there might be things that are happening that. Have a tax impact that you don't realize have a tax impact. Right? It's one of those,you don't know what you don't know, right?and we can be a little bit more proactive when we can when we have that information.

Calvin: 0:03

So, when should people be talking to their CPA?

Greg: 0:03

I would say, a mid-yearcheck-in at the veryleast, June, is in my opinion probably the bestschedule. And, every CPA is a little different on how they bill. But I know for me, if I had a client reach out and just send me a quick email, or want to havea quick five,10 minute conversation. I'm probably not gonna bill for that. Maybe something comes out of it where I do have to bill for but, I'd love it if more of my clients, just gave me a quick check in.

Calvin: 0:03

So audience members, you hear that call your CPA. They might not call you 'cause they're not the most outgoing people by nature. Butif you call them, make sure they answer the phone and talk to you.

Greg: 0:03

Yes, yes. The other thing to do is maybe rethink your business structure. And this is probably something that the CPA should be bringing up to you, if they're doing your taxes. But,a good example is if you're aschedule C, like a LLC, and maybe you could benefit from an S corporation. Maybe you could benefit toconvert to a C corp. Always good to have those conversations of, am I in the best structure right now? Are we set up for the most tax advantageous business filings, right now? Maybe every year it's, yeah, yeah, yeah, we're good. But then there's maybe that one year where you could really save some money. So, always good to temperature check that for sure.

Calvin: 0:04

Right. I talked to people and they may have a entity structure that made sense 10 years ago when they started the business, but things change, right? The business evolves, tax laws change. Like you said, good to get that temperature check with their CPA.

Greg: 0:04

Absolutely. The next one, I tell this to clients all the time. Maximizing deductions. So home office deduction, business mileage, anything where like the business has to reimburse you for expenses. A lot of business owners will just wait until the end of the year to do that. Some even wait until after year end where that might actually be too late. I would love to see business owners reimburse themselves on a monthly basis. I know that that can be a little much. Everyone's busy and they might not wanna go through that paperwork. But, doing it more often, catches more deductions. And so, home office deduction, I have a spreadsheet I send to my clients. It's just a template that they can, plug in their mortgage interest, real estatetaxes, homeowner's insurance, stuff like that. And they just reimburse themselves on a monthly, quarterly basis. If, maybe that works better for some people. But I definitely wouldn't wait until the end of the year to count up all your miles,go through your calendar. 'Cause you're definitely gonna miss stuff. The more likely you are to have to catch all the deductions.

Calvin: 0:05

So, while we're talking about home office stuff?is it literally just the percentage of your home that you use for business and you multiply that by your real estate tax bill and your electric and gas bills and water bills

Greg: 0:05

Yep. And so you'll have utilities. There's your indirect expenses. So you're talking utilities, mortgage interest, homeowners insurance, real estate taxes. So you would take, like you said thefootage of your home office divided by the square footage of, living space in your home, and you multiply that by your indirect expenses. Now, you might also have some direct expenses. Chances are you're running those through the business. But, maybe there's some that areyou decide to buy a, a new desk for your homeoffice expense. Chances are you're running that through the business, but Maybe you don't have that card that day or something. Just make sure that is getting put through as areimbursable expense for the business.

Calvin: 0:06

So Greg, when I first started out in business like 25 years ago, I used to hear the home office deduction was a bigger red flag, and you gotta be careful about deducting home office expenses. I assume things have changed these days, but what's the current state of that thought?

Greg: 0:06

Yeah, so things have definitely changed. Obviously,post COVID-19. Most people are working from home now. Most business owners are doing some form of business from home. You might have a, an officeat your work, but if you have an office at home where you're doing managerial activities, you're doing client work, then that still counts. Obviously, the home officeneeds to be usedfor business. Your kitchen table doesn't count, but if you have a room in your home that you just use for business, then that absolutely counts. I think it's less of red flag now.Obviously, if you say that, 60% of your home is a homeoffice, that might be a bit of a red flag. Typically, I see anywhere between 10 to 15% being used as a home office, and I think that's fair.

Calvin: 0:07

Cool. What else should people be thinking about after they get their tax returns filed in April?

Greg: 0:07

Thinking about funding retirement accounts. I know a lot of clients that will say, oh, I'm gonna fund my sep IRA this year and that's somethingthat you can fund, after the year end, before you file your tax returns including extensions. I might say, oh, well you can fund $30,000 or $20,000 to your SEP IRA and a lot of clients are like, oh, well, I maybe don't have $20,000. So I like to say,if you don't wanna fund it now, great, but put some aside every month knowing that you're gonna fund that when it comes time to filing your taxes, and then that way you have it. So if you're thinking, I wanna fund $12,000 to my sep IRA, a thousand bucks a month. Just put in maybe a savings account. And then when it comes tax time, you can just cut that check.

Calvin: 0:08

Yep. Good advice. And then, estimated taxes are always an issue. Maybe some of the listeners have been through this before, but maybe others have never gotten a deep dive on estimated taxes. Right? So, let's talk through estimated taxes a little bit. You don't have to file and pay estimated taxes, but what are the benefits and why would you want to do that?

Greg: 0:08

Yeah. so you're right. You don't have to,and. there's a couple of calculations you can do to figure out what your ES estimated taxes are and avoid the underpayment penalties. Let's rewind for a minute. So, taxes are actually due quarterly, as maybe a W2 employee. You're paying your taxes whenever you get paid. So you are paying quarterly. But as a business owner, you're obviously not paying quarterly. That's not like an auto payment. It is something that you have to think about. Now, a safe harbor estimated tax calculation that you can do. I'd say for 75% of my clients, that probably makes the most sense. Your estimated tax payments or your underpayment penalties. If your numbers aren't that big, isn't gonna be huge. We're talking maybe like three, 400 bucks and it's annoying, but it's a cost to doing business. So, my recommendation would be pay the safe harbor estimates, avoid that underpayment penalty, and then if you have to pay a little bit when you file your tax return. That's fine. At least you're not paying that extra three or $400 bill that's could have been avoided. I struggle with this a little bit because, you could pay me to figure out exactly down to the penny what your estimated tax payments are, but if I'm saving you three or $400 in underpayment penalties, but I'm charging you $1200 throughout the year to calculate that, that's not a win for my clients.Obviously the bigger client you are, the more dollars you're dealing with. That flips a little bit and you definitely wanna make sure that you're talking to your CPA to, nail down what those estimates are throughout the year. But, if you'remain street, USA taxpayer business owner, probably a good idea to get those estimated taxes, those safe harbor estimates from your CPA and just pay those throughout the year.

Calvin: 0:10

Cool. And so we talked a little bit about tax planning and quarterly meetings earlier. Sounds like you're not a big fan of you don't view tax planning as just projecting your tax liability. Right. You view tax planning as something different than that. Like you said, it's not worth spending $1200 to save a few hundred dollars of underpayment penalty. Right. So, in your mind, Greg, what do you view as tax planning that is actually worth investing in?

Greg: 0:10

There's tax planning and tax projecting as you kind of alluded to. Tax projecting is great 'cause it allows you to plan for how much you're gonna owe the IRS at the end of the year, and you can put that money aside and be prepared for it. No one likes to get that call from me this time of the year that, oh, by the way, you owe $20,000. Tax projecting is great because you can plan accordingly. Tax planning is how we get that $20,000 down to, 10,000, $5,000. And that's what we can do throughout the year. And that's where my value really comes in. I might not be able to help you every time, but if we can put a plan into place and get those numbers down, and then have maybe like a maintenance plan, maybe we're are checking inand we're talkingabout , did you reimburse yourself? How is the entity structure going? How are your books doing? Temperature checking all those tax planning topics that we put into place,that's, just as important as that initial tax plan where we're gonna save you 30, $40,000.

Calvin: 0:11

Right. You're trying to save clients money, not just defer the taxes into the next year.

Greg: 0:11

Yep, so this isanother topic that we're probably definitely gonna talk about, as the year moves on here, but, tax laws are going to change. Whether it's for the better or for the worse. We will see a major change in tax laws this year in my opinion.And,that's gonna require a lot of tax planning. So as of right now, most of the, trump tax changes are going to sunset, and that could spill for a, much higher tax bill for most business owners right now. I don't think thatwill be the case, but if nothing happens, there's a stalemate in congress, then we will see much higher tax bills for the 2025tax year.

Calvin: 0:12

What does the timing look like for that? When do we know, are we waiting until December 31st, 2025? When are we gonna know?

Greg: 0:12

Well, if you gowith how it goes historically, then yeah, 1231 is 11th hour probably a good bet? I actually have a client that I was talking to the other day that is in the politicalarena. And, I asked him about this and he said that we'll probably start seeing this heat up in Q3 with some changes coming through in Q4.

Calvin: 0:12

Okay, so some changes coming through in Q4 means

Greg: 0:12

Yep. Calvin: Maybe waiting until the end of December to know what the tax law is gonna be. It's a crazy world right now and I'm not sure when things will actually go through, but that's my guess. My guess is that, it's gonna be a crunched tax planning season in December.

Calvin: 0:12

Well, the key though is at least understanding what your taxable income's likely to be and what the estimated tax rate's actually gonna be. And maybe on the margin, there's some things you can deal with once. But, the core, you can figure out what your taxable income is likely to be and what your tax rate percentage is likely to be, right? And at least stay out of big trouble.

Greg: 0:13

And it's like a funnel, throughout the year, our projections are gonna be pretty broad in Q1, and then as you get down to Q4, they're gonna be a little bit more,we're obviously gonna be,more narrow and more on point. But right now it's just more of a staying ahead of the curve and making sure that we're not getting behind on, tax payments.

Calvin: 0:13

Cool. So what else should people be worrying about now ,that they're getting done with their tax returns?

Greg: 0:13

So as far as you forward looking, those are like my top points. But one thing to note, I've had this cap pop up a few times this year so far. A lot of people are saying, oh, I'll just extend and then, I'll file my return and make the payment in October.What people don't realize a lot of times is that an extension is a time to extension of time to file, not to pay. So, if you choose to go down that road of, I'm not going to pay my taxes, I'm just gonna file an extension, that interest and penalties will accrue for that. So my advice is if you don't, have the money to pay your tax bill now. At least set up a payment plan. Pay what you can, at least pay like the state and get that one outta the way. Just know that an extension is not an extension of time to pay. So,a lot of people miss that and then I have to deliver the bad news.

Calvin: 0:14

Yeah, so let's talk a little bit about that. How do small business owners avoid being in that cash crunch in April when they've got a tax bill due in March or April and they don't have the cash to pay it? I assume, one option is you would like to be a cash basis taxpayer and therefore, in theory you're not paying tax on profits that you haven't realized. Right? But,

Greg: 0:14

how Calvin: is it that people end up in that cash crunch? How do they end up in it or how do they get out of it?

Calvin: 0:14

Well, well. Greg: If you're an accrual basis taxpayer andwe file the taxes on a cashbasis, you might think that you didn't do that great. And from acash basis, maybe that's not necessarily the case.

Greg: 0:15

If you're not doing even just tax projecting throughout the year, gonna certainly see thatyou're probably gonna get surprised as if you're abusiness. And then the other thing is book to tax differences. So a lot of people might look at their books and say, oh no, I've got some losses or the income's not that high but then if there's, some book to tax differences. When I say book to tax, you have your accounting rules and then you have your IRS rules. And, what you see on your books. So, what does for their clients on a monthly basis with the bookkeeping. That might not be a true accurate reflection of what the tax return's gonna look like. One example might be depreciation. For depreciation, I typically will take accelerated depreciation on assets placed in service. If you put in to service a hundred thousand dollars piece of equipment that I can take full depreciation on in year one, great year one is gonna be a massive loss or a massivededuction for you on a tax basis. If it's 10 year, or we'll say 10 year foreasy calculation.If it's a 10 year asset that you're depreciating over 10 years on a book basis, you're getting a $10,000 deduction every year. You might be looking at it saying, oh, look, I've got this $10,000 deduction and then I'm over here doing your tax return and, saying, no, no, no, you don't have that, and now you owe at a 30% Calvin: Yeah, so in year one you've got a nice a hundred thousand dollars deduction, but years two through 10, you don't have that deduction. You don't have that. So, those are the book to tax difference. And those are those deferrals, right? And so we're always trying to do tax elimination, not deferrals because you're kicking the can down the road. Obviously you take both, but eliminations are better.

Calvin: 0:16

Yeah, that's one of the debatesGreg and I will have periodically, look to tax differences. 'causeI'm biased.I want accurate monthly financial statements. I don't really care what the tax return says. Greg's job is to minimize taxes for clients. However, he can do that within the confines of tax law. Whereas I care a lot about. How do the business actually perform each month and whether or not the operating metrics that we can measure. So, we get into this conflict a little bit occasionally around, book to tax differences.

Greg: 0:17

It's always fun. It's always, But yeah, and just another thing to note, quarterly estimates are due, at least for federal in most states. But April 15th, is your first quarter. June 15th, is your second quarter. September 15th, third quarter. And then, January 15th, is your fourth quarter estimate due date? So January

Calvin: 0:17

So, I've always wondered why June 15th instead of July 15th and October 15th? Any historical insight there,

Greg: 0:17

I I got nothing for you. I wish I knew. It makes no sense to me, but. those are the rules that we have to abide by. So, here we are. The other thing to think about too is, pass through entity taxes. So, every little different on how pass through entity taxes are administered and when you have to pay them and when you have to make the election, and all that. So just keep that in mind when you're talking to your CPA.

Calvin: 0:17

And so the pass through entity taxes is a relatively recent thing. I've just learned about it myself with help from Greg. But, it seems like you really wanna take advantage of that if you're in one of those states and you happen to have local taxes and et cetera. Right?

Greg: 0:18

Yeah, absolutely. The higher the tax, the more advantageous it is. I will let you in a little insider information. I heard through the grapevine that the federal government is trying to make that illegal for states tohave that law. We will see if that actually is true or false. But, I did hear that. that. might be on the chopping block, they will try to get rid of that workaround.

Calvin: 0:18

And so what are we really talking about here? What is pass through entity tax?

Greg: 0:18

So, it's the state's way to get around the itemized deduction. State tax deduction.

Calvin: 0:18

So, if you live in a wealthy town and you spend more than $10,000 a year on property tax and et cetera,

Greg: 0:18

Your itemized deductions are, you have your medical, you have your taxes, you have your mortgage interest, you have your charitable donations.Those are the big ones.Those taxes are made up of your estate income taxes, your real estate taxes, your excise taxes, and they all get added and then capped at $10,000. And so what a lot of the states did the higher tax states, California, New York, Massachusetts said, alright, great, we are going to allow business owners to take that state deduction at the federal level of their business tax return. And so, it passes through to them on the K1 as a tax deduction. It's a workaround to your,limitation.

Calvin: 0:19

So, the business pays the tax on behalf of the owners, and that reduces the taxable income of the business, which reduces the K1 taxable income to the owners.

Greg: 0:19

And your federal taxable income and you can see how the federal government might not like that. So, potentially on the chopping block, I hope not. It's a huge tax savings for a lot of my clients and so I'm really hoping that that's not the case.

Calvin: 0:19

Cool. All right, well, good conversation, Greg. Anything else, we want to cover right now in the post tax season

Greg: 0:19

No, that's all I got. Be nice to your CPAs. We're in the thick of it now.

Calvin: 0:19

Two more weeks to go.

Greg: 0:19

Yes. Two more weeks and then, we're back into the fun stuff. So. Calvin: All right. Well thank you, Greg. I appreciate your time and thank you for coming on again. All right. Thanks for having me.