Tax Planning For Your Business
Okay. Tell me about your hypothetical business. Lets do some tax planning for your business.
I’m a painting business. We’ve been in business two and a half years, roughly. We just did $550,000 in revenue. We do about 100 projects a year.
I have four guys that work in the field that are all employees and we do mainly residential painting with very light commercial. We might do an office building or something on occasion..
Are you familiar with any of the changes in the new tax law such as the Section 199 deduction that’s qualified business income that’s going to give you an extra 20% deduction off of your net income?
You heard all the thing about lowering the corporate tax rate, right?
Qualified Business Income
That basically affects big business. It’s not the typical small business. What they did is they created something called qualified business income and painters would fit into that. What that does is, let’s just say at the end of the year, you’ve net $100,000, you’d get an extra $20,000 deduction on your personal tax return against that 100. So that 100 turns into $80,000 worth of taxable deduction so you can basically do some planning to make sure, number one, you maximize that and you meet the criteria for that. A lot of guys where they paid people on 1099s and stuff like that, they have to make some changes because you need some W-2 income so there’s a lot of things.
What I would say is as we progress through going through your bookkeeping and seeing really what’s going on in your business, we’ll be able to make a lot more suggestions to you that’s going to help you save some money.
Good stuff. Let’s jump out of the role-play here.
I just wanted to give people a glimpse of the types of conversations that they should be having with their CPA. I’ve been blessed. I’ve had my same bookkeeper, Gina, for 15, 16 years now, whatever it is. She’s the only bookkeeper I’ve ever had, which is crazy, because most business owners I know have, like, 40 of them in that timeframe. This is somewhat of a conversation that I have with her on a regular basis, like we’re on the same page with some times and all that other stuff.
Have That Conversation With Your CPA
What I’ve seen in a lot of contractors, a lot of business owners is they’re intimidated by sitting down and having this conversation because we often don’t know the lingo. Does that make sense?
Even when you say something as simple as “An additional 20% deduction” or whatever it is, sometimes if we don’t live in that world and speak that language every day, it takes a little while for our brain to catch up. I’m just sharing me. That’s me. I’ve got my own issues and things like that and insecurities and this and that. So I want to encourage everybody to just dig in and work with somebody that you can have a conversation with this because if they’re not educating you, if they’re not taking the time to really understand where you want to go, then to me that’s one sign that you’re probably working with the wrong person.
All right. Actually, this would be a good time for this question. How do I know if my CPA is good?
I mean the average human being doesn’t know jack about taxes.
Is Your CPA Just Putting the Right Numbers in The Right Boxes?
If he’s a CPA, I’m going to assume he’s good at putting the right numbers in the right boxes. But if he’s really good, he’s going to be communicating with you. That’s how you tell he’s really good. Does he talk to you? How often does he talk to you? If I’m only talking to him during tax season, you’re leaving a lot on the table. It’s really all about communication.
All right. That was actually a pretty simple answer. I expected you to give me something more complicated, but that’s good. That’s what I love about this. You’re just like, “Well, just communicate,” which is kind of funny. Guys are like, “Hey, how could I be more profitable in the field?” I’m, like, “Hey, have a weekly meeting with your foreman.”
“How can I be a better salesperson to get my sales team going?” Communicate. “How can I have better relationships with my customers and less problems on the job site?” Communicate.
All right. Other ways that a business owner can use a CPA to their advantage, what are some things that come to mind?
Looking at your numbers.
What is your profitability? Where should it be? What is your cost of goods? How about your overhead? That’s a big thing. Where should it be? What are you overspending on? Based on my industry, where should my net profit be and whether you want to do it before your salary or after your salary? If your profitability is at 10% before your salary, okay, well, you have to eat, right?
SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.
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