I want to go back to one thing. For most of the people out there, taxes are not some things that we discuss at the dinner table. They’re not something that you discuss with friends and family very often. Sometimes … maybe it’s kind of like going to the doctor. Maybe you just go tot he dentist, whatever it might be, cut I can’t stress enough, it’s half of your incomes. It’s like, for an example, if I had to correlate a quick analogy I would say it’s kind of like your bed. You’re going to be sleeping half your life in this bed. You want a good bed. Well, you’re going to be giving away half of your income if you make good money and you have a strategy, you have to a plan. When it comes to tax planning you’ve got, I heard, a key man insurance.
I’ve heard of a lot of different things, and pay yourself first, and we talk about this word a lot, it’s EBITDA. It’s Earnings Before Interest Tax depreciation and amortization, all that good stuff. Let’s just go back to the core. Let’s go to the fundamentals. Let’s talk to businesses now that are either getting into it or really just … a lot of the guys and gals listening to this, they might only have five employees and I just … how do you talk to them about tax planning? Where do you start?
Well, we have a process that we go through and if you want me to take you through that process.
Yeah, let’s go ahead.
We have that business owner and he’s in pain because he feels like he’s paying more than his fair share of taxes. Our process is we have a conversation and we learn about his business and what’s going on in his life. Then we review his prior year tax returns and whenever possible his current year profit and loss, and balance sheet. Then we do an analysis and in the analysis we look for missed opportunities and mistakes that are costing them taxes. We go through that, we come up with a number of missed opportunities as far as a dollar amount. Then we convert that at that tax rate to what it’s costing them, and we say, “Okay, we could save you,” or, “You’re overpaying your taxes by $23,000 a year. We can do a tax plan for you.” We get paid up front. Our fee is 100% refundable and no one has ever asked for a refund because it’s 100% instant gratification.
Then when the client agrees that they want to go forward with the tax plan we take a much deeper dive into everything and we create a written plan that outlines the different strategies they want to use, and it includes the tax code that says you can do what you can do. We put the plan together, we go through it with the client, and then we help them implement it.
Okay, so I just … one year I went to H&R Block and this had to be-
-16 years ago. Okay, now I wasn’t even … I didn’t have the business running like I do now. I didn’t have as much tax liability, but I went there and I owed $3,000. Well, a friend of mine talked to me, and this is in my late teens, I think. He said, “Hey, did you write off your books? Did you do this? Did you do this? You get a credit for school, all this stuff.” I ended up getting $2,500 back. If I didn’t talk to him, that was a $5,500 shift. I know a lot of listeners out there that CPAs and whether you’re in general accounting, or you know how to do ledgers, or whatever it’s not created equal. The money that a good CPA can save you is pennies. I mean, their fee is pennies compared to what they save you, am I right?
Oh, yeah. You know, we like … I like my client to have a first year, or arrive at at least around 400%. It really is instant gratification. People look at your accounting and your tax costs as an expense. I like to tell them it’s really an income item. If you do it correctly you’re going to save more money.
Yeah, I wholeheartedly agree. I mean, I can’t even tell you, and it goes into this hiring process. Do you get any veteran write-offs? Do you have anybody that happens to belong to a Native American tribe? There’s so many little things. How big is the tax code book is like thousands of pages isn’t it?
Yes, it’s a very big book.
You know, I’m sure there’s the same lessons that apply. Give us a few tips that maybe obviously there’s a million tips I’m sure you can give us. Just give us a couple things when it comes to the home service niche that maybe we don’t think about.
Okay, let’s talk about … and these may not be pertinent with everybody-
We have something called a medical expense reimbursement plan, okay, that allows you to write off the out-of-pocket expenses for different health related expenses that you have that are not covered by insurance.
We recently had a client where his son had a disability and he needed special tutoring. This plan allowed him to take that and write it off. So, that’s it. Then we have the home office, which may not sound like a wonderful thing, but the home office opens up a lot of different other deductions that you could take, such as the home athletic facility, which could be your home gym or that home pool that you have, all right? Now to have a home office there’s certain rules you have to meet. The space has to be used exclusively for your office. You have to spend at least around 14 hours a week in that office, but I think most people that are working out of their home, or even if they have another office that they use are spending easily 14 hours a week out of their home doing work.
You know, yeah, I mean, that way I can pay for my landscaping, my garbage bags. I’m just kidding. I don’t know all the rules about that, but that’s something that I think everybody could take advantage of, you know, that probably are listening to this and that’s amazing stuff. Let me ask you this. At the end of the year, on cash basis, but … and I want to dive into this in a minute, but I know I can’t write off cost of goods sold, so typically there’s a lot of things I do at the end of the year.
For example, I prepay for all my advertising. I prepay a lot of advertising and I make sure that check’s cut by December 31st and I do two things when I do this. Number one, I negotiate the crap out of my advertisers and say I want 20% off for prepaying for next year. A lot of them say, “No,” especially the big companies like Valpak or Money Mailer, but a lot of the smaller ones say, “Absolutely. If you’re going to prepay me then absolutely, go ahead and do it.” Obviously that lowers my tax liability for the year. What are your thoughts on doing that kind of stuff?
Yeah, as long as you follow the rules that’s fine, and you have the cash. Obviously, you know, having the cash and saving the taxes helps you do those kind of things. If I did a plan for somebody and they saved $20,000 that they didn’t have to pay the government, then they could take the $20,000 and prepay their advertising and get a discount.
They just turn that 20 into 24. That’s the importance of planning.
Talk to me a little bit about cash versus accrual because I just did a loan to grow the business and they wanted to see a lot of accrual but for my business, at least, according to my CPA it was more convenient to be going cash. Tell me a little bit about your thoughts on that.
Well, right. Well, typically for a small business cash is the way to go. You know, the IRS has rules. Once you hit a certain amount you have to go accrual, all right. Banks typically, especially with service businesses, when it comes to financing they want to see accrual because accrual really does give you a more accurate picture of your business.
It’s matching income with expenses versus when you’re cash, like you said, you can prepay those expenses. Your P&L may be lower than it actually would be whereas they want to see what the business really looks like. What is your income? What are your real expenses? Okay. You finished that job, what are your receivables like? What’s your aging? We work with a lot of clients when they go for different financing or bonding and stuff like that, they need those accrual based accounting numbers.
Okay, yeah, so you guys have to be thinking about that as understanding the difference between cash and accrual and it basically is just how the cash is logged and expensed on the balance … well, what exactly … what have we got, the income statement and the balance sheet?
Correct. If you’re accrual basis and you’re a smaller guy, okay, you could have done a big job and it’s December 20th, you finish the job and you’re not going to get the check until January 15th. If you’re accrual basis you have to pick up all that income in December.
Whereas, if you were cash basis you would not pick up the income until you actually got paid. Smaller guy typically is going to want to be, for tax purposes, going to want to be a cash basis taxpayer. That doesn’t mean that they can’t have books that are also accrual based for the bank, and funding, and financing, and bonding.
Right. As you start growing the company you kind of sometimes you get thrown into switching to accrual, which then you going do CPA audits, and sometimes they just … it’s not considered an audit, it’s actually a review. Explain to me the difference of when a bank wants a review versus an audit and what that looks like.
Well, bank is often going to ask for an audit or a review and, you know, which their costly items to have done. A lot of times we’re able to talk to the bank and explain to them that this is a very burdensome expense for the client to have and the banks will, a lot of times, they will back down and they’ll take maybe a compilation, which is a small level and definitely a lot less costly than a review or an audit, or they’ll just take tax returns. They’re always going to ask for the higher level service.
Right, so that’s just a little bit of negotiating.
YOU SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.