SPEAKER_00: 0:00

This is the Empowering Healthy Business Podcast. And I'm your host, Cal Wilder. Each episode we'll dive into topics of force to folks who want to run businesses that are both nicely profitable, sustainable, and scalable, and who want to achieve balance in their lives and realize their potential inside and outside of work. The show is sponsored by SmartBooks, provider of bookkeeping and accounting for businesses. Let's get started. Hey Greg, welcome back to the show. Thanks for having me. Hey, I know tax season is starting to heat up for you.

SPEAKER_01: 0:39

The IRS opened for business last week, I think. Uh I've already filed a couple of returns. So yeah, we are we are in it.

SPEAKER_00: 0:47

Awesome. So what do you want to talk about today?

SPEAKER_01: 0:51

You know, it's tax season, and this is when a lot or pretty much every business owner taxpayer starts uh talking with their CPA. And so I kind of wanted to just touch on you know things that your CPA should be telling you, but maybe isn't. Um you know it's not that they're trying to hide this stuff from you, it's that um you know the system is just kind of built for um to be more reactive than proactive. You know, we're trying to file a lot of returns this time of year. Um and so if like if this is the only conversation with your you're having with your CPA, you're probably leaving money on the table.

SPEAKER_00: 1:36

Right. Because you don't have time to do like intricate planning and everything right now. You're trying to crank through a whole bunch of returns for a whole bunch of clients that want their returns filed on time.

SPEAKER_01: 1:47

Exactly. And you know, this time of the year, I'm pretty much just a factory worker putting numbers in boxes. The time to do planning is what the other uh nine or ten months of the year, right? Nine or ten months out of the year is perfect time to do tax planning.

SPEAKER_00: 2:03

Cool. So uh what do you have?

SPEAKER_01: 2:05

A list of uh list of top ten list or or yeah, my kind of top ten list, things that you should be thinking about, maybe conversations that your CBA should be having with you, that you should maybe be having with your CPA. Um, you know, I don't want to say red flags, but if you're not having these conversations, then maybe it's something to think about. You know, is is your CPA working for you or are they working for the IRS? Hopefully for you. Um, you know, so number one, tax prep versus tax planning. Uh I talk to a lot of clients that say or a lot of taxpayers who say, you know, my CPA is great, he gets my return filed by you know February 4th, and you know, I get my refund by February 7th, and you know, it's it's awesome. But um you know, the problem with that is that even if they're great at filing taxes, maybe they're not great at saving you money. Um so even if you have a good relationship with your CPA, even if they're getting things filed on time, it's really important to know that you're at least, you know, ask questions, keep them on their toes. Um, you know, am I saving enough money? If they put you on extension, then uh, you know, maybe that's what it takes. Um, you know, we'll get to that in a little bit. But um you know, that that one conversation a year just to try to be the first person to get your taxes filed isn't always the best thing.

SPEAKER_00: 3:50

All right. What's next?

SPEAKER_01: 3:52

Um not all tax savings opportunities are created equally. Um so you know, you have deductions and you have credits, and you have deferrals and you have reductions. So a deduction is a reduction in your taxable income, while a credit is a deduction or reduction of your tax.

SPEAKER_00: 4:16

So credits are worth, you know, dollar for dollar, right? Deductions are worth, you know, 30 or 40 cents, right?

SPEAKER_01: 4:24

Whatever your tax rate is. And so um, yeah. And I'll preface this by saying I sometimes advise clients to do this with an asterisk, but I I do say it. But you know, sometimes if your clients just talking to you throughout the year and just telling you to go buy stuff, you know, the whole like go buy a truck at the end of the year thing, um that's not necessarily effective tax strategy. Um, so just something to be aware of. Um, if that's the only tax strategy that you're getting from your CPA, might be worth exploring other options.

SPEAKER_00: 5:06

Yeah, you know, spending a bunch of money at the end of the year, I mean it does reduce your taxable income, but you don't want to spend a dollar to save 30 or 40 cents. So you want to make sure it's a good investment for the business. That's what I always tell clients. Make sure you're not just wasting a dollar to save 30 or 40 cents, make sure it's something that you would have bought anyway, you're just buying it a little sooner.

SPEAKER_01: 5:28

Yep, exactly. You know, I always say if you get a buy inventory or something, you get some jobs coming up, and you know they're they're kind of locked in. Yeah, this is a great time to do it. But I mean, at the end of the day, it's all uh a deferral, not uh a um tax reduction. So um keep that in mind.

SPEAKER_00: 5:48

That's an important point, right? Because you can defer tax in the next year, you can accelerate depreciation, but now you've taken all your depreciation deduction now and you don't have any left for the future. And so it's not always the best decision to minimize this year's tax tax bill, right? So what what uh what kind of considerations go into this idea of when it when it makes sense to accelerate deductions versus let them run out over time?

SPEAKER_01: 6:13

You know, you gotta really look at taxes over a multi-year period, not just uh, you know, 2024 taxes, 2025 taxes. Um and the idea is really income averaging. You know, the you really want to keep your income consistent year over year. Uh if you have some years where your income's way down because you you bought a bunch of inventory, but then the next year you don't have that expense. Now your income's way up. You know, you might be launched into a 37% bracket. Uh and that's doing no one any any good because now you're paying 37 cents on every dollar at that level.

SPEAKER_00: 6:58

Right, right. So you can have a bad year, in which case you probably don't want to accelerate or do anything to reduce your taxable income in a bad year. But if your profit margins go fat, uh the next year, maybe that year, you do want to do some tactics to reduce your income, right?

SPEAKER_01: 7:14

Yeah, bonus depreciation is a a big thing right now. Uh, everyone's trying to take like that that big deduction. Um, not necessarily always a fantastic idea. If you had maybe a down year, you bought a bunch of inventory or a bunch of assets, and then uh, you know, you're looking at next year and your income's gonna be way up.

SPEAKER_00: 7:38

Like you said, it's about kind of managing the multi-year income to avoid, you know, if you can avoid getting bumped up into the highest tax brackets every now and then by averaging it down, that's what you're saying, right? Yeah, exactly. Cool.

SPEAKER_01: 7:53

Uh and then, you know, on the other end of the spectrum, sometimes paying more tax is is okay. Um banks like a juicy tax return. So if you're kind of planning on aggressive expansion, you want to get some loans, uh, you're gonna want to make sure that your tax return is showing some higher income. You're gonna want to make sure it looks very healthy, which means that you're gonna have to pay a little extra tax. Um, it's kind of just a cost of doing business, unfortunately.

SPEAKER_00: 8:28

Yeah, some would argue that uh the size of your tax bill reflects how profitable and successful your business is, right? So you should be happy to pay a high tax bill because it means you made a ton of money. Not too high. Most people don't really want to pay too much of a tax bill.

SPEAKER_01: 8:45

Yeah, no one no one likes that advice, but unfortunately I've I've seen it happen where you know clients come back to me and say, Oh, I really need to have a solid tax return this year. It needs to look good because you know the bank denied me, and and I need this funding. So um they don't always like when I give them that the tax that goes along with that, but unfortunately it is what it is. Um you know, and then another thing that or I guess two things we'll we'll combine two here, but uh owner compensation and entity structure. Uh if you're not having these conversations with your CPA on at least an annual basis, um you might be leaving money on the table in in some way, shape, or form. Um you know the tax laws change a lot, um, at least every four years. Um and sometimes different structures uh make more sense. Um as the business continues to uh grow and change and evolve, uh certain structures make more sense. And so, you know, I'm actually in the process of doing several um S-corp to C Corp analysis for clients right now because um, you know, we're kind of evaluating like, does it make sense to um to be a C Corp versus an S-corp based on you know the the goals of the company where they are at financially, um you know, where the owners are at personally, stuff like that. So I mean, these are all clients that I had advised that S-Corp is the way to go several years ago. Uh and now I'm coming to them and saying, well, maybe that's not the same advice anymore.

SPEAKER_00: 11:20

Are there any particular situations where somebody does have an S-corp? Because I'm always of the mindset that you know over the years that S-Corps are usually very tax efficient for service industry type businesses to you know to you know avoid uh certain payroll tax liabilities, right? But there's some situations when the C Corp is more advantageous. Is there any kind of rules of thumb you could provide?

SPEAKER_01: 11:47

You know, it's not necessarily that tax they're the S-corps are gonna be less tax advantageous. I think most of the time S-corps are going to be tax advantageous. Um, it comes back to you know looking at the bigger picture. If you're trying to bring on um investors, if you want to have a second class of stock, um, you know, a C corp is gonna be much more advantageous for you. Are you gonna pay more tax? Probably. Uh, but you know, there are also ways that we can try to get that down. Um but um and then there's the uh the uh small business um stock exemption. So you know, you hold the stock in a small business for five years, the capital gains is or a portion of the capital gains can be taxed at zero percent uh when you go sell it. And so, you know, that's another thing that we considered, you know, exit strategy. Um, does it make more sense? It's also easier to transition a C Corp than it is an S-corp. So something to think about. Um so these are all things that you know we are constantly evaluating with our clients. Um, you know, does it make sense? Uh and if it doesn't, great, but at least we're thinking about it. And same with um with owner compensation. I know I kind of blew past that, but um you know, general rule of thumb, if you're an S Corp owner, the idea is that you pay yourself less uh compensation and more in um in distributions, but if your big goal is retirement planning, then that might not be the best strategy. Uh so a lot of you know 401k step plans are dependent on your um wages rather than what the the business is doing. So uh, you know, things to think about, um, you know, what's important to you as a as an individual. Um and so these are all conversations that we are are having with our clients to make sure that uh the tax strategies are aligning with their you know overall goals as as uh people. Makes sense. You know, and I talked about extensions. Um if your CPA ever tells you that an extension is for tax strategy, it's probably a lie.

SPEAKER_00: 14:34

And Cal, I know how you feel about extensions, so I hate extensions, but uh sometimes it makes sense and you just have to have to go on extension. But right, as you always tell me it's uh it's not an extension to pay, it's just an extension to pay.

SPEAKER_01: 14:48

It is not an extension to pay, yeah. So you still gotta you still gotta set, you know, if you're gonna owe money, you still gotta send that money in, um, or at least 90% of it. Uh and uh does it make sense sometimes? Yes. Uh do I advise some clients to extend? Absolutely. If you have a complex return, uh maybe we're waiting on some information, you know, we're waiting for a company to do an RD study, um, stuff like that, then 100% makes sense to um extend the tax return. But it is hard to do uh tax strategy or tax planning uh when you extend your tax return because it's all historical data. Um and you know, I think it's important to note that even if you do extend your return, you can still do tax planning for the current year. Um so you should still be having those conversations with your your uh CPA throughout the year. You know, if it's June and your tax return typically doesn't get filed until August, you should still be having a Q2 meeting to talk about um, you know, Q2 estimates, tax planning strategies, stuff like that. Uh and then, you know, along with that, year-end planning uh doesn't necessarily mean that you have to do it at year-end. Um I strongly encourage my clients to meet with me at least twice a year, um, you know, once in June, July, and then uh obviously once at the end of the year, uh, where you know we can at least have those touch points, see how things are going, get a pulse on the business, what's going on. Um sometimes it's really hard to remember what happened 12 months ago. Uh it's easier to remember if something happened only a few months ago. So uh and it's good to have those conversations with clients.

SPEAKER_00: 16:55

I assume uh just like business owners don't like surprise tax bills at the end of the year. I assume you CPAs don't like, you know, surprise new information that you find out only at the last minute when you go to file the return that you wish you knew about six months ago, right?

SPEAKER_01: 17:09

Yeah, I mean, there's definitely times where it's frustrating where you know you might find out that a client started a new business, um, sold a business, you know, and and you're finding out during tax time, it might have some serious implications. But um for the most part, sometimes I just feel bad because I'm like, oh, I you know, if you just told me I could have, you know, advised you to do it this way and we could have saved you a bunch of money. Um and you know taxpayers they don't know what they don't know, and and you know, sometimes uh they just don't think that it's information that's necessary for me. But that's why I like to charge a fixed fee for uh my my tax returns. And I'm usually pretty lenient on my uh billing because I want to promote that you know conversation. You know, some of my most successful clients are the ones that just shoot me a text uh here and there and just say, hey, you know, this happened, or you know, do I have to think about anything? Um and you know, that's that's the really the extent of the conversation, but at least we're we're having it. Uh let's see. Safe harbor estimates. Um you know, some people I talk to say, uh, you know, I don't need to talk to my guy. He he gives me the estimates, I I pay them, and then we you know, we file a return and we drew everything up at the end of the year. Safe harbor estimates are safe. I'll I'll tell you that. Um we do have clients that pay, you know, we give them the the four estimates and we say, you know, see you next year.

SPEAKER_00: 19:11

And the safe harbor calculations are based on the prior year. They're based on the prior year. So as long as, you know, you're gonna have a consistent year.

SPEAKER_01: 19:22

Well the risk is that you overpay, yeah. And so the idea is that you know, if you're trying to expand your business, you don't want to be using the IRS as a uh interest-free savings account for for the uh the next 12 months. So ideally, um you know, you're you're doing that planning with with your clients to um come up with you know Q2, Q3, and Q4 estimates that match how you are doing that tax year rather than how you did historically in the prior tax year. Especially if your business is is growing rapidly.

SPEAKER_00: 20:10

Which is why you like to talk to your clients a few times a year and just try to stay on top of the state. Exactly.

SPEAKER_01: 20:15

Yeah. Um I mean we have one client that they just started last la uh 20, yeah, beginning of 2024. I mean, in year one they did really well, and I think they showed about um 400,000 of net income passed through to them. This year they're gonna show about 1.5 million. So if we had paid estimates based on 400,000, that would be a really rough tax bill to get. Also, not a phone call that I want to have.

SPEAKER_00: 20:56

I'm glad you can laugh about these things, Greg.

SPEAKER_01: 21:00

Well, I can laugh about it because I'm on top of it, but if I wasn't, I I'd be trying to figure out I'd be hiding actually. Um, and along those lines, conversations should always be a two-way street. Don't assume that your CPA is always gonna reach out to you. Um, like I said, our our business model unfortunately is built to be reactive rather than proactive. Um you know, I think we're trying to do a good job of staying ahead of that. But there's always gonna be times where, you know, tax season where you know we're just gonna be a reactive um partner in the relationship. Um and it's important that you know, we're reaching out to you, but you're also reaching out to us, you know, should things change throughout the year, did you start a new business? Did you, you know, have a kid, did you get married, you know, things like that are are all important to to tax planning. And then um finally, you know, I I get some clients that come to me and and I've lost some clients that they say, oh, you know, I saw this thing on TikTok, and we we it sounds like a really great planning, tax planning opportunities. Guys don't pay any tax. Um or you know, my CPA didn't bring any ideas to me, and or you know, for the Last couple of years, and I just think I'm paying more money in taxes. And you know, I'll I'll say that yes, if you're not having conversations with your accountant, then you might feel like they're not doing their job to be proactive, and and that might actually be true, and that's why you want to have those conversations. But I'll be honest, I use five or six of the same tax planning opportunities amongst 95% of my clients. They're effective, you know, they're more or less audit-proof, assuming you document everything correctly. Um and we uh you know, we've we've had a lot of luck with them, and it's it can be boring, but sometimes boring is good in the tax world.

SPEAKER_00: 23:19

I will say I've been you know owning my own businesses for 25 years now, and I always talk to other business owners, and there's this belief out there that there's a way to avoid paying taxes. But I've been looking hard for 25 years and I haven't found a way to avoid paying taxes. I don't think there is a way to avoid paying taxes legally.

SPEAKER_01: 23:39

Yeah, I always feel bad when you know people come to me and they they saw something on TikTok, and I'm like, oh, yeah, no, that's that's not how that works. That's you know, we'll call that clickbait. Um but sometimes they're they're decent. You gotta kind of look at who is who's giving the advice.

SPEAKER_00: 24:01

But all right, so you walked us through your uh top issues list, and if I were to sum it up, I'd say you want to be talking to your CPA a few times a year, not just in Q1 when you need your tax return filed, right? It's that's yeah, two-way communication street. Have those conversations over the course of the year, keep your CPA informed about new developments in your business and your life so that the CPA is in in a position to help you the best they can. They they can help you based on what they know.

SPEAKER_01: 24:33

Book those meetings during, you know, if you're talking to your CPA at tax time, book those meetings, you know, at the when you're filing your tax return. And they don't have to be uh set in stone, they can change, but at least you know they're they're on both your calendars. Great. Yeah.

SPEAKER_00: 24:52

Well, thanks for joining us, Greg. If somebody wants to reach out to you with tax questions, what's the best way for them to do that?

SPEAKER_01: 24:58

Uh so you can shoot me an email, Gread uh at smartbookstax.com, or you can go to our website, smartbookstax.com, and you can book a meeting directly on my calendar there.

SPEAKER_00: 25:10

Awesome. Thank you, Greg. This has been another exciting episode of Empowering Healthy Business. We'll talk to you soon, Greg. All right, have a good one. Another episode in the books. Thank you so much for tuning in. For show notes and more, visit empowering healthy business.com. If you would like to have a one-on-one discussion with me or possibly engage smart books to help with your business, you can reach me at cal C A L at Empowering Healthy Business dot com or message me on LinkedIn where I am easy to find. Until next time, this is Empowering Healthy Business, the podcast for business owners, signing off.