Empowering Healthy Business: The Podcast for Small Business Owners
The Empowering Healthy Business Podcast is THE podcast for small business owners seeking to balance having a nicely profitable business, a sustainable, scalable, and salable business, lower stress levels, better work-life balance, and improved physical and emotional fitness. Yes, this is possible! Though it’s not easy. We’re here to help you navigate toward this objective.
Empowering Healthy Business: The Podcast for Small Business Owners
#3 - Top Tactics for Small Business Owners to Pay Less Tax
Explore approaches and tactics that small business owners can employ to pay less tax with Greg Reed.
Connect with Greg at:
smartbookstax.com
Sponsored by SmartBooks. To schedule a free consultation, visit smartbooks.com.
Thanks for listening!
Host Cal Wilder can be reached at:
cal@empoweringhealthybusiness.com
https://www.linkedin.com/in/calvinwilder/
Welcome to the empowering healthy Business Podcast, the podcast for small business owners. Your host, Cal Wilder has built and sold businesses of his own, and he has helped hundreds of other small businesses, whether it is improving sales, profitability and cash flow, building a sustainable, scalable and scalable business, reducing your stress level, achieving work life balance, or improving physical and emotional fitness. Cal and his guests are here to help you run a healthier business, and in turn, have a healthier life.
Cal Wilder:Welcome small business owners. We're recording this episode in early May, just after the annual tax deadlines for paying taxes in March and April. So I thought now it'd be a very timely episode while the tax season is still front of mind. And potentially some listeners are still feeling the pain from unexpected tax bills or the total amount they had to pay. So today's episode, we're gonna be focused on tactics for small business owners to pay less tax. In some would say taxes or the cost we pay to live in a civilized society and don't mind paying a large percent of their money and income tax. Others with a more libertarian bent would say taxes are the cost of living in an uncivilized society where people want to take our money and spend it on other things. But we're not here today to debate whether taxes are good or bad or too high or too low. What we're really here to do today is address the common question we hear from so many small business owners, which is how do they pay less in taxes, maybe they don't mind paying some tax, but they don't want to pay any more than they have to. That's what they want to know. So joining me today is Greg Reed. Greg joined smart books to build our tax practice starting in 2018, after about a decade in public accounting, and he is now the partner in charge of the smart books Tax Practice. And his focus is on supporting small business owners of small businesses and their business owners. So without further ado, welcome, Greg. Thanks for having me. Excited to be here. Great. Well, I know you've got some exciting moves to share. And before that could save, you know, small business owners 1000s of dollars, and I'm excited to hear more about those. But first, I just want to understand what your general approach is when it comes to advising clients on taxes. So with me, every clients their own, that they have their own issues, right.
Greg Reed:Some clients have some tax strategy will work for some clients, and some tax strategies won't. So for me, it's all about getting to know my clients really want to get to know, you know, what's important to them, get to know their families, their goals, their businesses, and then we can kind of take a full 360 approach to the tax strategy. So Greg, it sounds like your approach to servicing your clients is more of a year round responsibility, not just urine tax preparation and filing. Yeah, we take more of like a 15 month approach, right? So we start in January, and we'll start and and we go right up until we file the tax returns in March or April of the following year. If you come to me in March and April of the following year, and asked me to save money on taxes, there's not much I can do. At that point, I'm really just more of a historian. But if you start working with me on January 1, and then we have a good solid 12 months to tax plan and make sure we're paying estimated taxes and make sure we're taking advantage of all those opportunities, then that's where I can really be a true asset to my clients.
Cal Wilder:That makes sense. I know you've often said to me that you view working with your clients as like building a house could you explain to listeners what you mean by that? Yeah, so if you think about building a house right you have you have your foundation for me that's like the the books and records
Greg Reed:you know, I always tell my clients I can only do so much if your books and records are not in good in good shape. I always advise you know getting a really good accountant. Of course, using smart books, accounting is is a great option. And so, once you have that foundation, you have that solid book set of books and records that I can really trust then it then we get into the framing of the house right. So then we get into you know entity structure. Are you set up correctly? Are you an LLC Are you taxed as an S corp? Should you be a C Corp? Should you have multiple entities maybe And then we get into kind of the essential items, right? So electric plumbing, stuff like that. And, and for me, that's kind of the basic book to tax differences. So a lot of people probably don't realize that their financial statements are, are prepared on one set of rules, whereby I follow a completely different set of rules, which is the Internal Revenue Code. And, and there are a lot of similarities, but there's also a lot of differences there. And then, too, and we can go back and talk about some of these further. But then we get into the, what I would call the fancy finishing touches, right? So the the granite countertops and the sinks and all that stuff. And that's more like the, you know, retirement planning. You know, do we get into cash versus accrual basis of accounting, you know, where you get a little bit fancier with that stuff. Then you can get into some more advanced tax planning tax tactics, which is the Augusta rule, or adding children to your payroll. And, you know, that's where tax strategies can really start to add up. And then finally, you get into more of like a maintenance phase. So for me, that's kind of the the yearly tax returns estimated tax payments, maybe there's some sales tax, maybe there's some franchise taxes that we got to take care of annual reports. You have, you know, I work with some clients on a on a more granular level on on KPIs. And then after that, we get into more of, you know, building the team around you, I guess you could relate that to the the landscaping and the shed and maybe adding the pool to the yard. Right. And that's, you know, do you have a good CFO? Or do you need an outsourced CFO, you need a financial planner, estate planning for business succession and stuff like that. So
Cal Wilder:that's an interesting approach. And I like how you can frame the different categories. You know, one of the areas that, you know, we all get questions about that we have to deal with regularly are some of those essential items that you talked about, like, you know, based on the current years law, you know, how our meals and entertainment deductible, how do we deal with home office expenses? Can we benefit from accelerated depreciation of fixed assets. So maybe you could go through some of those, and kind of let listeners know the current state of affairs and how to approach maximizing those deductions.
Greg Reed:So, you know, after we've got, you know, the the books and records taken care of, we've got the entity structure set up, because that's all like a one time thing, right? Now we get into some of the basics, so meals and entertainment, and that used to be a lot easier than it is now. To write now, you can only take 50% of your meals, your business meals, that that are not related to entertainment. So entertainment is no longer a deductible expense that changed in 2018 with the tax cuts and Jobs Act. And so now it's very record keeping becomes almost more important now with with stuff like that. Because you can there are certain rules. You like everything with tax, right? There's always a it depends clause. And there are some rules where you can take 100% of meals. And that might be where you have employee recreation activities, holiday parties, picnics, stuff like that. But where the record keeping comes really important to me is, is when you have maybe meals and entertainment intertwined, I always use the example of going to a ballgame. So being in Massachusetts, obviously I'm a Red Sox fan. You know, if I take a client to Fenway Park, my I might pay whatever the going rate is for a couple of tickets. That is considered an entertainment expense that is non deductible. However, when I buy my overpriced They're in hot dog for me and my client and we're talking business, then that expense is deductible. However, if I were to maybe do like a package deal, and I really want to spring for the, you know, the box seats are something, and you know, all the meals and entertainment are included under one price, then everything becomes non deductible. So, thinking, knowing that stuff, and yeah, you're probably not going to make a business decision solely on tax, I always say don't let the tax the the tax tail wag the dog. But, you know, it's something to keep in mind. Right. And could certainly be a surprise if you're entertaining a lot of clients throughout the year. Because that could be a pretty big ad back at year end. You know, moving on to the home office, this is an area that surprisingly, I got a lot of questions on this year. And I think that it's probably a really underutilized tax saving strategy for for business owners. I think a lot of people know about it, but a lot of people don't fully understand what's involved, or what expenses you can take and how to take them and what's the correct way to pull that money out of the business. So right now, there's there's two methods to take a home office deduction, there is what they call the simplified method. And that you can just deduct $5 per square foot of your home. So if you say your office is 10 by 10, and it's 100 square feet, then you know, it's 100 square feet times$5 per square foot, and that's your your deduction. chance, I'll be honest with you, I typically don't do that for my clients. The the other method, which I find to be more advantageous, maybe a little bit more record keeping and information gathering is the called the regular method. And that is where you take specific expenses, and you calculate them. So from a home office perspective, you can have what they call indirect or direct expenses. And, you know, pretty straightforward and indirect expense is an expense where it's a cost, maybe the whole house, mortgage interest, property taxes, homeowners insurance, utilities, major repairs and maintenance, put a new roof on you can depreciate the house to that does create some issues down the road, you can choose not to depreciate that as well. But it does. Like I said it does cause some confusion down the road, especially if you're switching accountants. Or
Cal Wilder:if you sell the house, right, there's depreciation recapture, which presents an unexpected tax bill.
Greg Reed:You know, you you have a home office and then you close down the business and then you sell the house in 20 years. And you know, technically there's there's some depreciation recapture.
Cal Wilder:Oh, Greg, real quick. Just to clarify, you mentioned direct expenses and indirect expenses. So I get all what we're talking about. Now the mortgage, the utilities repairs, and maintenance will be indirect. I'm assuming you tell the clients you know direct expenses. We like your computer your monitor, you know, microphone. Yeah, things like that. You just have the company buy right?
Greg Reed:Home Office Supplies? Yep, certainly those those I would put more on like a home like office supply line item on your you know, I would have the company buy those. When I talk about direct expenses. I mean, if you want to renovate your your home office, and and especially like post COVID, right. So a lot more people are working from home now. Business owners are making their home office, their primary office. So maybe you spend 510 $1,000 to, you know, renovate the home office, maybe make a little bit bigger, add some shelving, paint it, add some new wiring items like that, that are directly related to or directly impacting the home office, then that would that's what I would consider a direct expense.
Cal Wilder:And those would be 100% deductible in some fashion and not prorate. dollars.
Greg Reed:deductible. Yep, those are not subject to the ratio. So back to the ratio, if your home office is 100 square feet, and your home is 1000 square feet, then your ratio is 10%. So you're taking 10% of the indirect expenses.
Cal Wilder:And to your point about record keeping being very important, I assume this is an area of high scrutiny in the event of an audit, right?
Greg Reed:Yeah, I mean, it's one of those areas that if they can start poking holes, then it's, it could open you up to a bigger audit, you could, you know, if you don't gain that trust from IRS agent, then they start to, quote, try to poke bigger holes. So I always advise my clients treat this as if you were reimbursing yourself as if you were a W two employee, submit an expense report to the business each month. At most, or a minimum, I'd say each quarter and have the business, reimburse you for those expenses, then you can just put those expenses as a line item on the on the business, and you get made whole again by being reimbursed, and then it becomes a deduction on on the business, this then gets passed through to you as as a taxpayer?
Cal Wilder:Great. Well, I think that pretty well covers, you know, general strategy with home office, what about some larger ticket purchases, where you may have to set up some kind of depreciation method.
Greg Reed:So this is back to where I was saying that the the Internal Revenue Code varies from what we were you would say, for for GAAP or just general accounting. The tax code allows us to take accelerated depreciation on various asset purchases. Now, there's two ways to do that. One way is bonus depreciation. And the other way is section 179. depreciation. bonus depreciation is actually on its way to being phased out right now, although, I think 2027, it will be phased out entirely unless there's additional legislation. And a lot of that, again, depends on who's in office, who controls the House who controls the Senate. And, you know, so So things that, let's just say they've been getting rid of bonus depreciation for several years now. bonus depreciation is a tax incentive that allows businesses to deduct a percentage this year, it's 80%, of the cost of qualifying assets in the year that they're placed in service. And when I say this year, it's 2023. Obviously, if you're listening to this podcast, in other years, it will be a different percentage. It was first introduced back in 2001, to really stimulate the economy. And then like I said, it's just been hanging around sentence. So under bonus depreciation rules, you can deduct the full cost of an asset, or now this year again, 80%. And that can actually you can, you can go lower than netting than netting up. So you can actually create a loss with with bonus depreciation, which could be beneficial. The caveat to all that is that you can't, some states don't allow bonus depreciation. So you might have, instead of a book tax difference, you might have a federal to state tax difference. So you really want to make sure that you have someone who understands these rules to when when claiming these these deductions. So alternatively, you have section 179, which is really designed for you even though the amounts to us might be large. It's really designed for small businesses. This also allows businesses to deduct the full cost of certain types of assets. And as the years go, the definition of what assets can be subject to Section 179 has changed, but it's mainly equipment, machinery software, are the big ones vehicles are in there. So it's again, it's you gotta have someone who understands the rules. knows and understands what can and cannot be deducted deducted. So when you're choosing between section 179, and bonus. But that being said, you can deduct the full cost of the asset you cannot take. You cannot go below zero, though. So if you drop your net income down to zero, and you still have not deducted the full cost of the asset, then that section 179 expense carries over to future future years where you can then take it. I made big fan of section 179. Because most states allow it. So, you don't get that that big swing between federal and state taxes.
Cal Wilder:Are there any scenarios that you see, with any frequency? Where it is not advantageous to take some form of accelerated depreciation?
Greg Reed:Yes, good question. So, the so back to getting to know your client, some clients are looking to get funding, well, I can I can make your tax return make you look really, really poor if you invest in a lot of new equipment. And, you know, we're taking that full ride off in year one. But maybe from a, you know, you want the return to look a little bit better for when you know, a an underwriter is looking at it, and you're trying to get a loan. In that case, maybe we decide not to take these accelerated depreciation tactics because you're still gonna get the depreciation, it's just gonna be over a period of five, seven, ten years. And whereas, you know, obviously taking it in one year, you get the big, the big bang for your buck there. But that's one of the scenarios where I will typically advise clients, you know, let's hold off, let's try to make things look a lot nicer than or a lot. Probably more actual than just taking full depreciation and making you look like you have a giant losing company. The next, the next big tactic that a lot of people don't necessarily well, I shouldn't say a lot people don't know about a lot of people, or a lot of accountants just take it. And I don't think their clients actually know that it exists. Because I get a lot of questions from clients saying, I heard about this qualified business income deduction, why am I not taking it? And then I'll have to tell them while you are taking it, and here it is, as a line item on your tax return. This is more commonly known as Section 199 A deduction. And it was also started enacted back when with the tax cuts and Jobs Act. And it's a it's really a pass through deduction. And so this was
Cal Wilder:something that would you go on your personal tax return, not the business tax return.
Greg Reed:This is something that yeah, when you get a K-1, so we're talking pass through entities now. As opposed to a C Corp that has its own level of tax. When you get a k one, there's information in the footnotes to calculate this deduction on your personal tax return. And this deduction is basically to level the playing field between small business owners who have passed through entities which is the most common type of entity for the most common type of entity for small business owners, as opposed to a large you know, seek more so the the section one nine a really applies to to small businesses pass through entities which makes up most of the Main Street USA businesses. And the reason for this was to really level the playing field between back when they dropped the corporate tax rate to 21%. You had all these small business owners getting upset that they now have to pay taxes on their At their individual rates, which the top rate is 37% versus a C court that is paying just like the the 21% flat tax. So there are some limitations to this. Certain service based businesses, doctors, lawyers, accountants are subject to additional limitations and exclusions there are there's a phase out for taxpayers over certain taxable income, and that gets adjusted each year for inflation. But high level it's a 20% deduction of your pass through net income. So, so that number on your unbox one of your k one is it's generally generally 20% of that of that number.
Cal Wilder:Okay, moving on. Another area of frequent question is travel expenses, and what kind of travel expenses can be deducted and which ones cannot.
Greg Reed:This is actually one of those areas where if you, if you know the rules, and you know them, well, you can actually use this to your advantage and really, maybe make your spouse happy and in at the same time. So, as a general general rule, you can deduct travel expenses that are both ordinary and necessary for your business or profession. The specific travel expenses you can deduct will depend on the nature of the business, the purpose of the travel and the type of travel involved. So, some basic ones transportation, so flights, taxis, train rides, stuff like that. You can use your own car, and you can take either the mileage expense, or you can do deduct the actual cost of gas, oil repairs and maintenance and stuff like that. And that gets into a whole nother a whole nother discussion. You have lodging, so if you have to be away overnight, then, and it makes sense that you're away overnight, then you can deduct the cost of lodging, meals, this is where you can, you know, reasonably deduct the cost of of meals while you're away for business. And then business related expenses. So conference fees, Internet access on the plane and the hotel room. And then, you know, shipping expenses for for business materials.
Cal Wilder:So, Greg, what if I take a business trip, but in the middle of it, I take a two or three day vacation trip? How does that work?
Greg Reed:So if you're going to plan a business trip, maybe you're maybe you're planning a conference, and maybe an annual or semi annual conference. I would say make sure that you have a Thursday, Friday, Monday conference, and now you have the weekend where you got to stay where you're staying, maybe that's Bermuda, maybe it's Florida, somewhere nicer than where you would normally stay. You know, your personal residence. And the time spent. While you're over the weekend, Saturday and Sunday, yeah, you can't deduct those expenses, because that's personal in nature. But you do get to deduct the hotel for the nights of that are business related. You do get to jog to your meals that are business related, travel both ways. That's kind of the key to you know, having it over the weekend. And if your spouse is actually part of the business, then you could actually turn this into a nice little weekend getaway for you and your spouse.
Cal Wilder:That sounds good. Anything else Greg you want to cover before we get into some of the what you call the fancy finishing touches that can save some more serious dollars.
Greg Reed:This is less of a tax saving strategy and i Another topic that came up Several times this year with clients is capitalization policies. So so back to my accelerated depreciation rules. A lot of companies will have a, what is a capitalization policy, a capitalization policy is a policy for a threshold for when you will expense an asset. And when you will capitalize it or depreciate it. For smaller businesses, that number can more or less be set by management. However, it's usually between 2500 to $5,000, depending on the size of the business, the type of business, stuff like that. But I find that if you have a policy in place it does make it does ensure some consistency and how assets are accounted for. And, you know, now that depreciation is starting to phase out and we don't know what's necessarily going to happen with section 179. It could become more important to know what can be expensed and what can actually be or what has to be depreciated over, you know, that five or seven year period. So just something to keep in mind for business owners as as bonus depreciation starts to phase out here.
Cal Wilder:So what's the reasonable threshold for small business to adopt?
Greg Reed:Anywhere between 2500 to 5000? Okay,
Cal Wilder:and just to reiterate, that allows you to avoid having to worry about applying some accelerated depreciation method that may or may not be in the process of being phased out in order to get that full year one tax deduction.
Greg Reed:Correct? Yep, yep. So you know, the name of the game is to try to write that off in in year one, however, that however you do that, and if you're allowed to expense it, because that's your company policy, then that just makes everything really easy and streamlined.
Cal Wilder:Great. All right, let's get into some of your fancy finishing touches here that can save us some real money. And that probably require, you know, more than you're gonna get from a lot of general CPAs or TurboTax, to help you through it. Right. So what are some of these more advanced strategies?
Greg Reed:So the first one is retirement planning. And, as a business owner, this can get, this can certainly get tricky. And there's a lot of what I call gotchas in in these rules. So things that you can do contributing to tax advantaged retirement retirement accounts. So such as a IRA, a 401, K, a 403, B, these can help reduce taxable income, grow retirement savings. These are all made on a tax a pre tax basis. So when you contribute to your 401 K, and maybe there's a catch up contribution in there, that all gets pulled out, pre tax, and then if the company makes a matching contribution, that is also obviously a deduction on the company. So you're, you're pulling all that money out, you know, maybe 30 $40,000, tax free. And then the idea is that when you take that retirement country or that contribution, and you pull it out for retirement, you're in a lower tax bracket. I alluded to the catch up contributions. So if you're over 50, you can make what they call a catch up contribution. This is just, you know, because you're maybe a little bit older and closer to retirement, that it allows you to contribute more to your retirement rather than if you're on the younger end. Another rule is, is Roth conversions. I would Roth conversions are one of those areas where you could you would you definitely want to talk to your CPA, but you'd also want to talk to your financial advisor, because there's a few things to think about with that. But basically, you would convert your traditional IRA to a Roth IRA, you pay the tax at the time of conversion, and then everything is that accumulates is tax free. Again, depending on your tax bracket and where you are in life, that could be a good idea. It could all So cause you to pay more tax than just keeping it in, say, a traditional IRA. So definitely something where you want to have that team around you to make sure that that's a sound tax strategy. Another one, delaying Social Security benefits. So you know, the longer you delay, the more you get, you know, and where's that breakeven point of, of pulling out your Social Security, versus delaying it and getting more money, right. And that's stuff that we can certainly help clients analyze, you have tax loss harvesting. So, you know, in down economies, like we are now you know, selling investments that have lost value that you feel, aren't coming back to offset capital gains, then you can certainly, you can certainly reduce taxable income that way, I've had several business owners who have sold businesses this year, that have simultaneously sold off losing investments to reduce that bid cap gain, that they're being hit with, with the sale of business. If you have money to to burn, or you are well off, and you want to, you're feeling very charitable, you can certainly do charitable contributions, you can do that directly from your, your IRA, you could set up a charitable trust, that's another potential tax strategy to reduce to reduce taxes. And, you know, these strategies, you know, when we get into the the charitable trusts and charitable contributions from your IRA, you know, we're really talking to the the high net worth business owners. You know, these probably are not for people who are either just getting started or, you know, are really looking to grow their business. You know, moving on, that the next analysis that we will do, and this is, this is one that can get pretty tricky. And you also need to make sure that if you're switching accountants that they're aware of, of this. It's cash versus accrual basis of accounting. So, cash basis and accrual basis, counting are two methods on accounting that the businesses can use to track their income and expenses. cash basis is very much you know, money in money out. Easy record keeping, and accrual basis is more, you know, you're dealing with receivables, payables in and there's more to it's a little bit more complicated. In, you know, revenue recognition and expense recognition, and, and all that. And so, from a financial statement perspective, accrual basis, eats cash basis every day of the week, because it paints a much better picture of the business and your finances. So if you're making decisions for the business, you know, accrual basis, I advise all the time. But from a tax perspective, that may not be the most advantageous method of accounting. And luckily, we are allowed to deviate from the financial statements when preparing the tax return. So your financial statements might be on accrual basis, and your tax return might be on a on a cash basis. And so what that means is that each year, we need to go through an analysis of accrual versus cash basis accounting and figure out what that difference is, and then run that difference through the p&l. And so
Cal Wilder:So what are some of the most common scenarios that would cause cash basis to be a lot different than accrual basis?
Greg Reed:So if you have high accounts receivable, then I will generally advise clients to I will advise clients to move to a cash basis for for tax purposes. It's a one time deferral really because at the end of the day If you're you're just deferring those receivables to a future year, right. And the idea is that, you know, if you have$100,000 in accounts receivable in year one, you would defer those because you haven't received the cash yet, you would defer them to year two. Now, the trick is that in year two, that the receivables you can defer to year to year three, and it dominoes right. So the
Cal Wilder:so in theory, you could kind of defer that$100,000 Forever, provided nothing big changes in the business that would cause you not to be able to do that in a future year.
Greg Reed:And so the trick is that you never let that deferral get too big, right, because you never want to get to the point where maybe you're selling the business and you need to recognize all those receivables and now you've got a million dollar deferral built up that you have to pay tax on at the highest rate. And so it's it's about managing that deferral. Now, alternatively, if you have a lot of payables, but not a lot of receivables, then maybe the accrual basis of accounting is is a much better tactic for you, because you can accelerate all those expenses. And you can keep, basically the accrual or you give the book and the tax on the same basis of accounting, which makes it a little bit simpler to, to, you know, for record keeping and and comparing the two. Again, these are tactics that you really need someone who understands the nuts and bolts of both accounting and tax to, to make that determination of does this make sense for you? And then going forward, you know, making sure that you're managing those receivables at year end and those payables at year end? That it so that it's still tax advantageous?
Cal Wilder:Right? Because once you do it one year, now you have a liability to manage that or play that game every subsequent year, or you're gonna get hit with an extra large tax bill.
Greg Reed:Yeah. And once you make that election you're locked in. So there's a, I believe it's five year period where you are locked into that decision. And you cannot get out unless unless you're on a cash basis. And then you get to the certain threshold where you have to be on accrual basis. But for the small business owner, and let's define small, it's under 25 million in annual revenue, then, where we're able to take that that cash basis method.
Cal Wilder:All right, so Greg, tell me about this Augusta rule, I had no idea it existed until you mentioned it to me a few years ago,
Greg Reed:this one's near and dear to my heart as a avid golfer. This comes it's also known as the Masters exemption. For any of those golf nuts out there, you'll appreciate this one. Basically, it allows homeowners who rent out there. It comes from the Masters tournament, which is a big golf tournament and held in April. And it allows homeowners who rent out their homes for up to 14 days or a year to be exempt from paying taxes on that rental income. Now, Augusta Georgia, I don't I've never been down there. But from what I hear, there's not a lot outside of the grounds of the golf course. And people will rent out their homes because it's, you know, a week long tournament. So it's less than 14 days, they will rent out their homes to the players, maybe the media to patrons, and they will, you know, they can charge a premium on that. Right. And then they don't have to pick up the rental income because it's less than 14 days. So the the caveat to that is you can't take any deductions against it. So if that whoever you rent it to trashes the house and it costs you a lot of money to to, you know, fix it up or whatever, then you got to you can't take those deductions without picking up the income. But that being said, if you charge say $10,000 For the week, that's $10,000 of tax free income in your pocket. The Uh huh. Now how do you use this for for your business? Right? You know, say you rent out your primary residence for 14 days or less during the year to your your business. Now that's a deduction on the business. So and you know, why would you rent out your your primary residence to your business? Maybe? Maybe you're having the team to your house. So instead of renting out a hotel for a couple of nights, you're having the team over to your house, and you're doing team building activities and stuff there. Maybe you're hosting a dinner? It doesn't have to be a consecutive 14 days, it could be, you know, three days a quarter, four days, a quarter, yeah, three, I guess three days a quarter would get you there. And
Cal Wilder:you could host your quarterly management meetings at a property that you own and have the business pay you a reasonable rental cost.
Greg Reed:Yep. And what is reasonable reasonable is, you know, you look around at what the cost of a hotel room or a hotel venue might be for, you know, in that area, at that time period, and and that would be the cost that you would use. So if it's $1,000 a night, then maybe it's a $14,000 deduction at a, you know, save 35% tax rate, that's almost a $5,000. dollar for dollar tax savings.
Cal Wilder:Cool. What else can can business owners do?
Greg Reed:If you really want to put your kids to work and make sure that they're learning the value of hard earned dollar, you can add your children to payroll. And it can be a very lucrative, tax saving strategy, when done correctly. Now, there's, again, those tax strategies that we're talking about, there's a lot of gotchas. And you really want to make sure that you're doing it by the book. So the work has to be legitimate, you can't just put your kids on payroll and you know, have them not do anything. The pay must be reasonable, you can't pay your you can't pay your your nine year old $12,000 a year to take the trash out once. And depending on what state you're in, you obviously want to make sure that you're adhering to maybe like labor laws and stuff like that. But in general, you know, we're talking high level here. If you add your children to payroll, and they're meeting all those requirements, you can pay them up to the standard deduction. So let's just say for conversations sake, the standard deduction is$13,000.
Cal Wilder:So that's the US federal threshold below which you don't have any federal tax do.
Greg Reed:Yep. So on your individual return, you have either standard or itemized deduction. If you're single, then that standard deduction changes every year with inflation. But again, for for our sake, we're just going to use $13,000.
Cal Wilder:So the first $13,000 that your child receives as wages, he or she doesn't have to pay any federal tax on that.
Greg Reed:No federal tax. Now, I will say, in you know, being in Massachusetts, I understand the Masters laws very well. You only get $8,000. So there is going to be a differential there where you will have to pay the 5% mass tax on. But I guarantee you that the tax savings on the federal level will outweigh that, that cost,
Cal Wilder:right because what you've been effectively doing is reducing the business taxable income by $13,000 per child, which flows through to you is$13,000 or $26,000 less in taxable income and goes to your child that virtually tax free, right? Right. That's that's the big benefit here. That's the gist of it is
Greg Reed:this is taking out 13 Out is paying the child $13,000. And you so that's getting that deduction, which gets passed on to you, the child doesn't have to pick it up as taxable income. And let's just say you have two kids. So that's, you know, using my $13,000 Number 26,000 You know, say an effective tax rate of 30%. That's a $7,800 tax saving strategy. So between the Augusta rule, and the and the, you know, hiring your kids, we just saved you $13,000 a year, multiply that by five years, that's a pretty good chunk of change that gets put back in your pocket. Now, there are, there are instances where you will still have to pay payroll taxes for your kids. But there's also strategies where you can get out of paying payroll taxes on that $30,000 of wages, you can set up a what we call a family management company, and which is basically just an LLC, owned by either yourself or you and your spouse, I always recommend it just one person owns it, so that we can put it on a on your personal return as a Schedule C. And then that family management company, pays the kids and invoices the business, it basically, you know, leasing the kids to the business. That actually sounds terrible. But that's in in any context, that's what, that's what you're doing the family management company leases, the kids to the business, the business pays, you know, that invoice would that money from the invoice the kids then get a W two out of the family management company. Otherwise, if you just pay them directly out of an S corp, then you would have to pay them? The you'd have to you know, have them be subject to the FICA and Medicare and, and all that stuff.
Cal Wilder:Well, all right. Sure, any other major tactic that you want to share before you move on to kind of how do you maintain the house that you've built?
Greg Reed:Um, you know, I think at the end of the day, tax laws are lucrative are fluid, they're always changing. And so it's important for business owners, in my opinion, to keep that relationship open with your, your CPA, don't be afraid to, to have conversations with them, don't be afraid to pick up the phone and call them. I, I'm very open with my clients that I don't charge you every time I pick up the phone and answer or answer an email. Because I want to have that, that relationship. You know, as you know, things change, people change, situations change. And as those changes occur, maybe additional tax saving strategies do come into play. So I guess moving into more of the maintenance phase, you know, these are the things that I always joke that we got to get right, right, as a, as a CPA, I can't, you know, these are the ones that that really matter. So, you know, we want to make sure the tax returns are are filed on time. Or, you know, if if you do need some additional time to pull your records together you can always file an extension. But I think one piece that people don't always understand is that an extension to file your tax returns is not an extension of time to pay your taxes. So regardless of when you know whether you file an extension or not, your taxes are always going to be due on either March 15 or April 15 Depending on where you are and what kind of tax return you file. The next thing is estimated tax payments a lot of people don't like to pay taxes during the year and I think this is where a lot some people can get stuck you know you you don't you file your taxes in April and you don't think about it because you know it's like ripping off that band aid and you're like alright, alright to do that for another year. Unfortunately, taxes are due quarterly. And a lot of people don't know that especially if you're like a just a straight w two employee you are paying your taxes quarterly you're actually paying them either weekly, bi weekly, monthly. Whenever you get a paycheck. business owner, you got to be more conscious of, you know, when your incomes coming in and paying those estimated tax payments. The fee, or the penalty for not paying those is not huge. But it could potentially be, you know, a penalty that you could do without, you know, having an extra 500 bucks in your pocket versus the government's is, you know, it just, it just makes sense to me.
Cal Wilder:Or there's the risk that the cast gets invested or spent on something else. And it's not all there at the end of the year, when you need to pay your tax bill, right?
Greg Reed:That happens to for sure, it's, it's easier to let it go during the year than writing that really big check at year end, when, you know, maybe, maybe you paid those bonuses a little too high and a little too early. So it's good to tax plan with your, with your CPA throughout the throughout the year. You know, we offer different packages for our clients, we talk to our clients either on a monthly basis or a quarterly basis, a semi annual basis or an annual basis, at the very least, I really encourage my clients, you know, to chat with me in December, November in December. Just so that, you know, let's reject out those tax liabilities. In a worst case scenario, you've got two or three months to come up with those with those with that money to pay the taxes. You know, maybe there's something we can do to get it down, because it's still year end. You know, it just makes sense to to have those conversations.
Cal Wilder:So Greg, I know there are a lot of COVID related stimulus programs for small businesses to take advantage of, have those all passed? Or is there anything still that could be taken advantage of now,
Greg Reed:I know COVID still kicking around, and so are the tax credits or tax saving strategies. So the one remaining right now is the employee retention tax credit. This is a pretty lucrative tax credit, I will warn people that there's a lot of companies out there who are just out there to try to make a quick dollar. So you know, be very careful about who you have doing that analysis and claiming this, this credit because it is expected to be highly audited. But basically, it's you know, people are getting 100 $200,000 in, in in tax credits and payroll tax credits refunded to them. So there's a lot of I don't want to get too much into it now. But there's a lot of again, gotchas that that you have to think about.
Cal Wilder:What what's the potential tax credit per employee that's available?
Greg Reed:Depending on the quarter that we're talking about, it could be five to 7000 per employee.
Cal Wilder:Wow. Well, definitely worth looking into if you haven't already. Well, it's still available before it expires. Right?
Greg Reed:Yeah. And it'll start sunsetting in July. So and then I'll just domino from there. So you're looking at about six quarters worth of potential tax credits.
Cal Wilder:All right. Well, you know, one takeaway I've had in this discussion, Greg, is that if we're trying to manage and optimize taxes, and especially once you're up into a higher tax bracket, it's not something that you just can expect your CPA to take care of, at the end of the year for you. Right? It's, it's more of a a year round effort. And it's much more of a team effort, right, when it comes to, you know, things that impact retirement and estate planning and things like that. So, you know, what do you see business owners really needing as far as a support team beyond their CPA, especially when they get into that kind of higher income tax bracket or higher net worth level?
Greg Reed:Yeah, certainly. I mean, obviously, you know, having, you know, back to my foundation, having a good set of books, so having a really great bookkeeper, you know, to maintain the daily records, but then, you know, on the other end, having, you know, a solid CFO or outsourced CFO to help make those big business decisions, having a financial planner, on the, you know, maybe on the business and the personal side To help, you know, with retirement strategies, someone that I can work with closely I certainly I, I think that I know the tax saving strategies very well, I am not a financial planner, I am not great with with things like the retirement savings, stuff like that. And that's where building that team and me working closely with those people is really important. If you are super wealthy, maybe it's estate planning, you know, how do you pass that the income to, you know, the next generation or the generation after that in the most tax efficient manner? And then, you know, a lot of people are building their their businesses as their retirement strategy. How do you pass that business on to the next generation, pull the money out that you need to retire? And, you know, in the most tax advantageous way, you know, when you start that, you know, obviously, if you wait till you're ready to sell that year, it could be detrimental.
Cal Wilder:Makes sense? Makes sense. So if i To recap, in 60 Seconds or Less here, your approach and your recommendations for small business owners when it comes to paying less in taxes, you know, we got to have good books and records from your accountant or bookkeeper. So you've got the data to do planning and analysis and make decisions right? Need to have a legal entity that's tax efficient based on your specific business operations. Want to make sure we're taking advantage of our basic deductions that most any CPA or maybe even TurboTax could help you with? And then consider more advanced strategies that could save you even more serious amounts of money. But for works, you definitely need a more experienced and sophisticated tax advisor to help you develop and, and execute right. And then like you just talked about having that team of advisers, when it becomes necessary for you, sir, that's pretty much the gist of it or anything. Anything else you'd like to add? Greg, before we wrap up today's episode?
Greg Reed:No, I think I think you nailed it.
Cal Wilder:All right. Well, thank you so much, Greg, for taking the time to share this valuable information to our listeners. I think a lot of people are probably walking away with at least one tactic that they could use to save money on taxes if they are so inclined. If anybody wants to follow up with you directly, what is the best way for them to connect with you?
Greg Reed:Visit our website smart books tax.com. Smart books plural tacks.com. And you can book a meeting with me directly on the main page. They're just a half hour meet and greet. Happy to, you know, walk through your situation more specifically, and see if we're a good fit to work together.
Cal Wilder:Great. Well, thanks again. Greg. Great speaking with you.
Greg Reed:Thanks for having me.
Cal Wilder:Reference shownotes and find other episodes on empowering healthy business.com. If you would like to have a one on one discussion with me, or possibly engage smart books to help with your business, you can reach me at Cal "C-A-L" at empowering healthy business.com or message me on LinkedIn where I am easy to find. Until next time, this is empowering healthy business, the podcast for small business owners signing off.
