Common Sense Millionaire
Common Sense Millionaire
EP 17: The Hidden Maze of Small Business Taxation: Insight and Advice
Ready to unmask the unnerving world of small business taxation?
This episode of the Common Sense Millionaire is a treasure trove of insights, revealing potential pitfalls and how I learned to sidestep them. Let's pull back the curtain on everything from the consequences of unreported cash transactions to the importance of a reliable tax preparer in navigating the labyrinth of deductions and expenses.
Hear how not reporting your income can dramatically shrink your Social Security payout in retirement and how the IRS leverages technology to track improper deductions.
In the second half, I'm presenting a blueprint for handling your tax returns with confidence and integrity. High-income earners, gear up for some invaluable advice on engaging a tax professional to minimize your tax burden. There's a few red flags that trigger IRS curiosity, such as dubious home office deductions and ostentatious business expenses, and we'll discuss those too. Plus, we're delving into the murky depths of overseas bank accounts and the dangers of evading self-employment income.
We are about to journey through the labyrinth of taxation, filled with must-know tips and advice!
Thank you for listening to The Millionaire Mindset Podcast with George Dines.
To connect with George visit www.georgedines.com
To Schedule a call with George visit: https://georgedines.com/contact/
Welcome to the Common Sense Millionaire, where we work to promote your financial advancement in knowledge process and education so that you and your family become financially secure. This is the place I share Common Sense Action Steps that you can take today to assist your financial advancement. So sit back, grab a drink and let's get started. Common Sense Millionaire here. The session today is going to be kind of interesting and I think it's probably one of the most important aspects of a small business. Okay, what are some of the tax consequences of having that business? So I bring this up because a lot of people are really ingrained in wanting to start a business, of course for the benefit of themselves and or their families, and to provide a brighter future financially for everyone in the family, also for the employees that are hired or the consultants that are paid. All of that. There's a chain there. It's like the chain of life. It's the chain of financial life that creates money for people and especially for Black folks. But what are some of the consequences? What happens? Well, what happens is a lot of times people make things up for their filings or they're not following the IRS policies and procedures, and that's a big problem. What are some of the things here that raise concerns. I have been to numerous community events where I talk about the importance of tax planning and importance of getting a very strong tax preparer to work through some of the issues that may come up in the business. Biggest problem I have well, actually, there are two big problems I have when I think about them. That really piss me off. The first one is cash transactions. So people just exchange cash and don't record the transactions, but they will come to you with information that show that they lost a significant amount of money. Now they sold an item, so there was a cost to that item. So they're showing that there is a loss with items that were sold, because they're taking the deduction for the purchase of the inventory and you're like well, wait a sec, how did you lose $20,000? Okay, it doesn't make sense. So that has to mean that there are cash transactions taking place that aren't on the books. Now, if I, who do not own that business, can computate that number, well, what's the IRS going to do? Well, what is the state going to do? This is one of the key items that the IRS looks at. They're looking at large deductions or excessive losses. So it just doesn't make sense if you can afford to buy all of that inventory and whatever the product is, but you have no income. That makes no sense. That's a cash transaction, okay. And what's the? How do you explain this? The end of the chain on that okay, is that at the end of the year, you're not probably making enough money to pay for self-employment tax. Okay, I'm going to give you a very, very bad self-employment tax story.
Speaker 1:Individual that I know worked for cash, just cash. Never declared the cash, never filed that with taxes. They just cashed. They took cash and accepted it for over 20 years in a particular profession, and the profession dearly did not require any extreme certification or any special classes or anything like that. It was a good business, but it was all done in cash. So none of it was reported, none of it. So now what happened is this individual is now much older than 65, decides they want to retire. They figured out that the amount of money that they were going to get from Social Security because that person never funded a pension plan at all the maximum that they could get from Social Security was $1,400 a month.
Speaker 1:Now I want anybody who's listening to this. I want you to explain to me that you can send an email or something you can tell me. I'm crazy. How are you going to live on $1,400 a month If you've got to pay for housing, you've got to pay for gasoline, you've got to pay for food, you've got copays for medical care, and that's because working with cash transactions and spending the cash, but now you don't work and you're only going to get $1,400 a month from the federal government through Social Security. I think that's a problem. I have been laughed at when I talk to people about this at events and they're like oh no, I don't pay no taxes. I don't pay no taxes, but they're driving a huge car. It is a very nice car. Eventually, this cannot continue going forward.
Speaker 1:The IRS is really really closing in on business activity because they see that's where a lot of improper deductions are occurring and that the government is losing money by not properly monitoring what's going on with small business. In the olden days I was told that for the IRS to analyze anything on a return, their computers had to be custom programmed in order to get it done and it would take days or maybe even weeks for the programming to occur before they could run it, and they could only run one sequence of that at a time. Now they have a special unit at the IRS. It's the small business, self-employed, and I had a meeting with them. I was attending a meeting and they were speaking and it scared the you know what out of me when they were talking about how now they are getting to the stage where, if they find something that looks interesting, they have almost unlimited ability to test everything out there to find the other tax returns that are mirroring what they're seeing as suspicious. So that means eventually, all of the little funny things that everybody is doing with this, they're all going to be coming together in one great list and they're going to pick who they're going to audit to see what's going to happen. So this is very important. So another thing that the IRS is looking for are weird home office deductions. Okay, if you're not sure what you're doing, again get a professional, because they're looking for that and that's a really big red flag for abuse of the deduction, excess or lavish business expenses Okay. So if you're spending $4,000 for a client meeting, that's going to raise a red flag, okay. Right now it's very difficult for them to look at that, but within the next four to five years. It's going to be routine as they're running and running analytical analysis on everything to come up with what's reasonable, what appears not unreasonable. We need to flag those particular returns.
Speaker 1:Another big, big problem, and I recently had this situation where clients, family had joint bank accounts in another country. They forgot to actually report that and it was a pure accident. They didn't mention it to me, I didn't know. Typically, when I have a client that's from another country, I make sure to ask these questions because a lot of times people from other countries they may maintain a bank account in the country they're from for the benefit of their family there. Okay, there's no problem with that, it just has to be reported properly.
Speaker 1:Such charitable deductions without documentation, that's not going to work anymore. As a matter of fact, I have a lot of people who've spoken to me about charitable deductions where they take clothes or other kind of like kitchen pans and pots and all that to a place and they get this receipt where they say thank you for your donation. Now, it doesn't say on that receipt how much it's worth, because they don't want to get in trouble for saying that. And so when I'm faced with a client who's got this same slip and say, well, it's worth $600,. I don't do those anymore, I refuse. I say, okay, I will do this, but I need to know how much you paid for it. What was the date you paid for it. I need you to appreciate it to its current value and that's the amount that you're going to get to deduct. At that point nobody wants to talk to me. But I don't do those anymore. Please don't do those, especially with a business account. If it's not right, don't do it.
Speaker 1:The biggie self-employment income. People are doing everything to dodge self-employment income because, hey, right, they may have a regular job where they're paying self-employment income for that job, and then they have a profit in their small business and they're going to have to pay self-employment. So they're doing crazy things to escape that. Okay, there's another way to do it. One is to look at your entity structure and go into an entity that does not require you to take self-employment tax, as long as you pay a reasonable salary to the owner of the business.
Speaker 1:If you've been audited before, you can expect that you're flagged. There's no question about it, especially if you've done something really kind of off the shelf, and that's why I always ask for copies of returns prior to working with a client, and if I do see something funny, I'll have them go to their IRS account and download information from there in terms of they'll give you the IRS, will give you an income report that shows all of the money that you earned that was reported to the IRS. Sometimes you have to look at those things to make sure that you're moving in the right direction. And I would say finally, well, the last two items extremely important. The first is you cannot make mistakes. If you make mistakes and errors on the return, you will be flagged. You're going to get a nasty letter and they're going to adjust your return and if there's any additional taxes due, they're going to charge you interest for that. You don't want to do that.
Speaker 1:The second is high income tax earners. High income tax earners are immediately flagged. That's why it's very important that if your business is, say, structured as an LLC simply is that, but you're making significant income you need to talk to your tax professional or your CPA or accountant or whatever to see if there are any options for you with your structure where you can minimize some of the results of the high income levels. And I think the last thing is called kind of integrity. I like to think that I have a high level of integrity. I turn people down who do not have high levels of integrity, and it's very important that you have that integrity to want to do this right, because it's not just about you, it's about your family, it's about your friends and about your professional reputation. You don't want that to go down the tube because you tried to mess with your business tax return or you gave the wrong information to your tax preparer. Just remember, once you sign that return, that return belongs to you.
