Tax Mistakes and Tax Strategies with Dr. Karen Litzy of the Healthy, Wealthy and Smart Podcast

Tax Mistakes and Tax Strategies

Now, in this episode, we talk about the biggest mistakes small business owners make regarding their taxes, tax strategies medical providers specifically can use to lower their tax bill, retirement planning vehicles that are right for you, and how can proactive tax planning help private practices.

Now, aside from all of this great information you’re going to get on this podcast, Craig has a free gift for everyone, Ten Biggest Tax Mistakes that Cost Business Owners Thousands. So if you want this free gift, head over to podcast at HealthyWealthySmart.com and get this free gift from Craig.

I have it, it’s great. We talk a little bit about some of this in the podcast, but it goes into much more in depth in this free resource. So, check it out at podcast at HealthyWealthySmart.com, under this episode click on the link and get your free gift.

And on that note, enjoy this interview with Certified Public Accountant, Craig Cody.

Hey, Craig, welcome to the podcast. I’m really excited to have you on to talk about taxes.

Well, thank you very much for having me. I’m happy to be hear.

And have … How often have you heard someone say, “I’m excited to talk about taxes?”

If they’re not from my inner circle, not often.

Exactly. Now, a lot of my listeners are business owners or small business owners, entrepreneurs, so I think learning about taxes, what we can do to maximize what we take home, so keeping more of what we earn, and what are mistakes that we don’t want to make. So, let’s start with that question. What are the biggest mistakes you see small business owners making regarding their taxes?

Failing to Plan

The biggest mistakes I see is people failing to plan. So, they’re going to buy a car, they’re going to buy a piece of equipment, they do all this research, it comes time for tax time, there is no planning. Maybe planning, maybe sitting down with their accountant in December to figure out how much of a payment they need to make by January 15th. That’s not proactive planning, that’s just being reactive.

So, taking the time to communicate with your CPA and figuring out a plan where you can keep more of what you make.

And how do we do that?

So-

What should we be looking out for?

Correct, so let’s talk about having the right business entity that you’re operating out of. So many times, you know, the business entity is, you know, I’m starting a business, they talk to the attorney, the attorney says “Okay, form an LLC, form a Corporation, form an S Corporation,” or they hear somebody else say “Oh, yeah, do an LLC.”

That’s how they decide what type of an entity they are going to work out of, instead of having maybe the attorney, the business owner and the CPA sitting down, or having a phone conversation saying, “Okay, what makes the best sense for us to operate from a liability point of view, and from a tax point of view?” A lot of times you can have your cake and eat it.

So, what questions … If I’m a potential entrepreneur or business owner, what questions should I be asking my CPA about what business entity is best for me?

Well, you should be saying, “What’s going to work best in my particular situation so I’m able to minimize the amount of tax I pay?” So … And that’s all, you know, prefaced by is this a side hustle? Do you have any other entities that you work out of? You know, what else is going on in your life? Are you … Do you have a spouse? Does that spouse have income?

And then taking all that information together they can figure out, okay, maybe you need to be an LLC, or maybe you need to be an LLC taxed as an S corporation. But, by having that conversation, you’ll figure it out and, you know, you could save eight to $10,000 dollars a year by having the right entity.

What?

Yeah, right.

Wow. So, what’s the difference? What’s the difference between an LLC and an S Corporation from a tax perspective?

From a tax perspective the main difference is self employment tax. On an LLC that’s taxed as a sole proprietor or a partnership, you’re paying self employment tax on every dollar of net income, whereas if you’re an S corporation you’re going to pay reasonable compensation and pay self employment tax on that, and everything above that reasonable compensation is not subject to a self employment tax.

Depending on where reasonable compensation is, what else you have going on, one or the other can make sense. You have to do an analysis, it’s not a hard analysis, you just have to take a little bit of time.

And let’s say … Let’s take an example, okay? So, let’s take me as an example. So, I want to start a small physical therapy business where it’s just me right now. I don’t have any employees. I don’t have any dependents, and I’m not married. So, what would make the most sense for me, or what … Like, how would this conversation go between us?

So, is this your only source of income.

Yes.

Okay.

For simplicity’s sake I’ll say yes.

Right, for this conversation, okay, it’s your only source of income, and what do you expect to make your first year?

$100,000 dollars.

And what do you think you’ll do your second year?

150,000.

Okay, so, maybe an LLC might work best, but the wonderful thing about an LLC is we could also make a late election at some point and decide that, you know what? Maybe I really wanted to be taxed as an S corporation instead of a sole proprietor. So, it gives us a lot of flexibility to see how things wind up.

But why would the LLC work best for me in my situation?

Maybe because the amount of self employment tax you’re going to have to pay after all your expenses is not going to be that great. The different between having an S corporation and an additional compliance that needs to be done on an S corporation. Compared to the savings in self employment tax. There’s no benefit there when it comes down to dollars and cents. I am sure if I told you, you know what? If we made an election and it was going to save you $10,000 dollars a year, you’d probably say, “Maybe it makes sense.”

YOU SHOULD REVIEW THE THE NEW TAX LAW CHANGES WITH YOUR CPA BEFORE IMPLEMENTING ANY TAX PLANNING STRATEGIES.

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