A Conversation With the Service Business Mastery Podcast and Tersh Blissett

We are listening to the “Service Business Mastery” podcast. I’m your host, Tersh Blissett. This is the podcast focused on business owners, business managers, and service technicians who are considering becoming business owners. We started in January, and we are documenting and sharing with you all of our trials and tribulations, ups and downs, and everything that goes into starting a new business. On today’s episode, I talk with a CPA based out of New York. When we’re first starting out a business, there’s so much information that’s required of us. Things that we do before the business even gets started strongly affect the way our business operates for the next couple of years, and yes, you can change your entity later on, but if you get it right to start with, if you’ve prepared going into the process, it makes things a whole lot easier for you.
I wanted to reach out to Craig and just pick his mind for a second and share with you what he had to say because I received his book, “The 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands”, and after reading it, it really opened my eyes on certain things that I have been guilty of in the past and I’ve run successful companies in the past, but I still have fallen into the mindset of not wanting to get flagged by the IRS. Whereas, if you’re doing what you’re supposed to be doing, like he says in his book, there is no reason to be fearful of the IRS so I reached out to Craig, and I wanted to record our conversation so that I could share as much of that information with you as possible.

Hello, Craig Cody. He’s a CPA out of New York. He spent about 17 years as a New York City law enforcement officer before deciding to go to school to become a CPA. Hey Craig, it’s Tersh.

Hey, how you doing?

I’m good. How are you? What’s going on? I have a few questions. I’ve spoken in the past a couple of times, but I wanted to record a conversation with you if that’s okay?

Sure, no problem.

Okay, cool. So, I have a couple of friends who have asked me questions via Facebook–our Facebook group–and then I have a few questions after reading your book. Do you have just a second that I could ask you those? Okay, great. Can you tell me a little bit about the new tax update? We’ve all heard it, it’s been a huge buzzword in the media, but how’s it going to affect us as small business owners?

The big thing we’ve heard about is the lower tax rate on C corporations, which doesn’t really affect a whole lot of businesses out there because most businesses that are corporations that are considered small businesses, are typically not C Corporations they are S corporations. So what they did is, they lowered the top rate on a C Corp to 21%, which is actually beneficial. It used to be like 39%, so when we do planning based on the new changes on Code Section 199, which we’ll talk about at some point. C corporations can be a beneficial planning tool.

Can you tell me, really fast, what’s the difference between a C Corp and an S Corp?

A C Corp is almost like a fake human being. It pays its own tax, so the corporation makes money to have income, they pay tax and then in order for them to pass that income over to you, it either has to come out in salary or a dividend. That’s a C corporation. An S corporation effectively pays no tax. Typically, most states have a fee that they charge you for having an S corporation and all the income passes through to you and is taxed at your rate.

That leads me into a great question that a friend of mine, Michael, has. His question to me, to ask you was, “Is there a benefit in the new tax code to swap from an S Corp to a C Corp with the tax lower?” He said, “It’s my understanding the tax rate would be lower for the C Corp.” He’s currently an S Corp, but he’s not familiar with it. He’s not familiar with the ins and outs of it.
The tax rate could be lower on the C Corp, but because the C Corp almost has double tax, meaning the corporation gets taxed and then when you get taxed, it’s basically you get taxed again, it’s–we call double taxation. So I’m in a group and I run a mastermind. Guys all over the country that do what I do, and we all got together in the middle of January to go over this and see what new planning opportunities there are with new tax code and we ran the numbers on “should you convert to a C Corp” and almost always it doesn’t make sense to convert your S to a C corp for the tax—because of that. Especially now with the S corporation and Section 199, which is depending on the type of business you are, you’re going to get a 20% deduction for that pass through income, which means if you do $300,000 on your K1, you’re looking at like a $60,000 deduction on your personal return and there are certain limitations such as wages and stuff like that that you have to follow. But that’s all the more reason why in this case an S Corp or an LLC –or even a Sole Proprietor would make more sense than a C Corp.

And with an S Corp, is that the corporation you have to pay yourself a reasonable amount?

Correct. You do have to pay yourself a reasonable wage. We use compensation studies when we do tax planning, we do a lot of tax planning because we work with business owners, and we do reasonable compensation studies and it’s based on what you’re doing in your business. So if you’re a neurosurgeon, you’re taking a $20,000 salary that’s not going to cut it. So you have to take a salary. In order for Section 199 to work, you need to have wages, but it’s a huge planning opportunity. I call it the Full Employment Act, that new tax act because it creates a lot of planning opportunities for business owners where if they’re a C Corp where if they are an S Corp or an LLC, there’s definitely going to be planning opportunities where they can use C Corps and some other strategies.

Okay. So you so graciously sent me your book and is there anything in your book that has changed with the new tax code?
Yes, we actually updated the book.

Oh, you’ve updated the book?

We’ve updated the book for the new tax codes. So we have a whole chapter on Section 199, which is—Section 199 is the thing that’s going to affect small business owners the most, in a good way.Get your free copy of my book here!

All right, and so one of the biggest things that, in your book and just in doing taxes in general, that I’ve noticed is that most people make a huge–and before we get too far into it, what’s the name of your book?

My book is “The 10 Most Expensive Tax Mistakes that Cost Business Owners Thousands.”

Perfect. How much of a problem is it or how advantageous is it for people to make sure that they’re doing planning out properly-because I know that’s a big part of you. You won’t take on a client unless you do the planning process first.

It’s a huge part. And when we do planning, we like to see the client that’s going to save like $20,000 a year in taxes. So that buys you a lot of shoes.

So a lot of people, they see their CPA a once a year or quarterly if they do quarterly taxes. And at that point they’re like, “Hey, here’s a stack of papers, file my taxes and tell me how much I owe.” What’s your thoughts on that?

I think you should be communicating much more often than that. It should be a two way street as far as communication goes. And you need to be working with your CPA throughout the year. Most CPAs–accountants are good. They’re putting the right numbers in the right boxes, but it’s kind of ending there. So you need to reach out to that person, that he or she, and start a dialogue and hopefully they’ll continue the dialogue because the more they know and the more you communicate, the more they can help you. So we like to talk with our clients like once a month, and it could be a short 15 minute call, could be a five minute call, but we’d like to go over the P&L every month, kind of ask the questions we have, and just by talking to people you’ll find out what they’re doing and maybe there’s a more tax efficient way to do it.

Yeah. And the conversations that you have typically are they really structured conversations? Or are you just having like a, “This is what we’re doing right now. Is there a tax beneficial way to do this?” Because there’s a lot of times where you don’t even think that something you’re doing is a tax benefit

The structures typically has to do with the P&L and a Balance Sheet, but they don’t typically stay on point because it’s just conversation, “Well I’m doing this and “Well, okay, let’s do it this way.” I just had a client that went, “Oh yeah, well we just sold the house and we’re moving into the building where we’re running our business and we’re putting up an apartment. And then we’re going to sell it in two years and we’re going to get that deduction. I’m like, “Whoa, whoa, hold on, stop. You can’t do that, it doesn’t work that way.” Just by talking to people.

Me personally, I feel stupid whenever I talk to a CPA or accountant in general. I’m like–typically if I feel dumb about something, I’m just going to be quiet so I’m not going to really say anything.

Yeah, and you’re not alone there, but you should have that open line of communication. It’s kind of like you do what you do for a living or if I’m talking to my plumber, he starts explaining stuff to me. It’s way over my head. Okay, so you hired a professional for what they do. Yes, you want them to be able to explain it to you, but your knowledge; your level of understanding doesn’t have to be a 100%.

A lot of people feel that your CPA and your accountant are an expense, is that true or should it be?

People look at it that way, but they should look at it as an income item because what happens is you go see a guy in March and your taxes due March 15th, there’s not a whole lot of planning he could do because the year’s over. Maybe you pay them $2,000, but your tax bill was $30,000 higher than if you maybe pay them some more and you worked with them throughout the year, but you save $30,000 in taxes.

Is there an average that you should, as a small business owner–say you do less than a million dollars–is there an average that you should expect to pay for a good CPA, or is it going to range across the whole country?

Honestly, it ranges based on what they’re doing, how much work they’re doing, how they bill. We bill on a flat rate while client’s based–and we have clients all over the country–what somebody is paying us in New York. It’s the same as somebody who’s paying us in Louisiana or Wisconsin, et cetera. So that’s never been an issue. As far as, well, the guy down the road, who was charging me $50 a month and well, okay, and this is why you probably have all these issues because he can’t possibly be doing what he needs to do for $50. He’s got to eat.

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