Today, we’re going to talk about the exciting topic of taxes with Diane Gardner from Tax Coach 4 You. It’s always comforting to talk with someone about taxes who refers to themselves as a tax superstar.
Diane will help you understand why tax planning is something you need to be paying attention to. And, this is not something that you just do in December right before the year ends.
Here are some of the things you’ll learn with Diane today:
- Why you might not need a CPA when an enrolled agent will do.
- Why you need to do tax planning at the proper time of year.
- Understand why the type of tax entity your business is is important.
- Should you use a home office deduction and if so, how?
- How to keep track of your vehicle usage for taxes.
- And, lots of other ideas for how you can save on your taxes.
Narrator: Welcome to The Sustainable Business Radio Show podcast where you’ll learn not only how to create a sustainable business but you’ll also learn the secrets of creating extraordinary value within your business and your life. In The Sustainable Business, we focus on what it’s going to take for you to take your successful business and make it economically and personally successful.
Your host, Josh Patrick, is going to help us through finding great thought leaders as well as providing insights he’s learned through his 40 years of owning, running, planning and thinking about what it takes to make a successful business sustainable.
Josh: Hey, this is Josh Patrick. You’re at The Sustainable Business.
Today, we have Diane Gardner with us. We are going to be talking about the exciting topic of taxes. Now, she refers to herself as a tax superstar. But I’m going to bet some other people might refer to her as a tax nerd. But that’s okay because I like nerds because I’m a nerd myself. So let’s bring Diana in and we’ll be talking about taxes today and what you can do to limit the amount you pay, or at least that’s what I think we’re going to talk about.
So, hey, Diane, how are you today?
Diane: I’m doing fantastic, thanks so much for having me on your program.
Josh: Well, it’s my pleasure. So, you’re an enrolled agent. And just for people who are listening, what’s the difference between an enrolled agent and a CPA when it comes to tax preparations?
Diane: Well, Josh, an enrolled agent is licensed by the IRS. And so, we’re licensed to be able to do taxes and represent our clients or taxpayers across all 50 states, where most CPAs are licensed by the State that they’re in, sometimes they carry licenses for a couple of different States, depending on, you know, where they’re located – where they’re living. But an enrolled agent, we specialize probably deeper in the tax realm than your average CPA which is more of an all-around accountant. But then, we have enrolled agents like myself who do a lot of other accounting services as well.
Josh: Yeah. That’s pretty typical for my understanding also. So, I’m coming into your office. I’m a brand new client and I tell you, “I hate paying taxes.” And what do you tell me I need to do?
Diane: Well, first thing I would love to do is do a free tax analysis for you. And so, what that would entail would be allowing me to look at your last two years business and personal income tax returns to where I can go through. And a lot of the times I can come up with some either mistakes or missed opportunities.
Because you’re a business person, you’re in the middle of running your business. You’re busy. You’re doing what you do best which is out there, making a living and selling your products or your services. It’s not your job to stay up on the tax law. That’s my job.
So, most of the time, business owners and entrepreneurs are operating in a world that they don’t know what they don’t know. And so, by allowing somebody like myself who’s a certified tax coach, to take a look at their records, to take a look at their tax returns – maybe a Quickbooks backup or something along those lines, we’re able to pick up on things that you probably aren’t even aware of that could potentially be deductible and save you some money on your taxes.
Josh: So, what are some of the typical mistakes that you see business owners making in the way they handle their tax liabilities?
Diane: Well, the very biggest mistake I see is a complete and total lack of planning. They pull everything together at the last minute, drop it off at their accountant or their tax preparer’s office, do a quick sort of Hail Mary as they run out the door. And hopefully, when they get the phone call it won’t be too bad.
And that’s how most entrepreneurs and business owners tend to operate because that’s what my own clients like to do. And so, I just see so many missed opportunities when they do that because if you don’t plan, you end up just paying whatever the bill comes to, instead of realizing that you could take advantage of totally legal IRS-approved deductions and stuff that you didn’t even realize.
Josh: So, if I was to do proper tax planning, what would I be doing?
Diane: Well, we’d be doing things like taking a look at your entity type for your business. Are you in correct entity type considering where you are in business? Because most people, when they start out in business, they’re not making much money, so a lot of times they’ll start out as a sole proprietor or maybe a general partnership if they’ve hooked up with a friend or a spouse or somebody. And over time, as that business starts growing and then starts maturing, if they’ve never ever gone back and looked at their entity type, they could be in an entity type that’s costing them thousands of dollars in excess self-employment tax. So, that’s one of the areas we really like to look at.
Josh: So, when you say entity, what do you mean by entity?
Diane: Well, the various entities are sole proprietorship, which means that when you first start up a business, basically, if you do nothing, by default, you are a sole proprietorship. That entity says your income and your expenses get reported on your personal income tax return. And 100% of your net profit is subject to self‑employment tax of 15.3%.
Now, that self-employment tax takes the place of the Social Security and Medicare that you used to have deducted from your paycheck when you were an employee. At that point in time, you paid half and your employer paid half. Once you’re self-employed then you pay both sides of that and that comes to the 15.3%.
Then we have other entity types such as a limited liability company. And some States are very LLC-friendly and others aren’t. We have entities like a general partnership or corporations.
So, we have two types of corporations – an S corporation or a C corporation. And the difference between the two corporations are – an S corporation, the profits or the losses from the business pass through to the owner’s personal tax returns and then they’re picked up there; versus a C corporation who pays its tax right on its corporate tax returns.
Some of those entities offer liability protection and others don’t. So, entities such as an LLC or one of the corporation types can give you some liability protection. And depending on the type of business that you’re in, that could be really important.
Other entities are great at allowing you to deduct quite a bit in the fringe benefit areas. And a C Corporation really shines there. But then there’s entities that allow you to potentially write off 100% of your medical expenses through your business and a sole proprietorship works best there.
So, I say all this to say that there’s a very thorough analysis that needs to be done to see if your business is in the entity type that it really should be for where it is currently today.
Josh: Okay, cool.
So, I’ve now got myself in the right entity, what else do I need to be doing for effective tax planning?
Diane: We have so many businesses today that operate from home, so then we want to make sure is, “Are you taking advantage of your home office deduction? Or were you aware that you could event deduct that?” A lot of people, you know, that work from home aren’t even aware of that one. So, we make sure that your home office deductions are correct.
We want to take a look at your mileage, your auto expense deduction. Should you be taking standard mileage or should you be taking actual expense?
Josh: Can you explain the difference between the two, please?
Diane: You bet. Yes.
Standard mileage, for 2016, IRS allows us to deduct ¢54 per mile, for every business mile driven. Well, on the actual method, we have to keep better records because in addition to having the written mileage log, we also need to keep track of the actual expenses that we spend on our vehicle which is your fuel, your oil changes, your repairs, tires, insurance, license – all those types of things could potentially be deductible. And so, we always want to look and see which is going to give our clients the higher deduction – standard mileage rate or actually keeping track of the actuals.
Now, if you have multiple vehicles out there. Let’s say you’re a contractor of some sort. You’ve got three, four, or five guys out there with trucks then you end up having to keep the actual rate. You can’t take just standard mileage on that type of a thing. So, there’s some really pluses and minuses, depending on your individual situation.
Josh: So, after I’ve set the right entity and I’ve got my vehicles straight [inaudible 00:08:28], what’s the next thing you’d like to look at?
Diane: Then I want to start doing some snooping and seeing if maybe we have some meals and entertainment that you’re missing out on. A lot of times people don’t understand the rules behind the meals and entertainment deduction which means that bona fide business meetings or business meals are deductible at 50%. But what people sometimes forget is, in addition to going out and meeting somebody out in public, what about those times when you have groups of people over to your home and you forget to write down or keep track of the expenses incurred there? So, sometimes that’s one that people miss out on.
Then, we like to look at retirement planning. Are they doing any retirement planning – number 1? And if so, are they in the right retirement plan for, here again, for where your business is? Whether it’s in growth mode, or is it just a startup mode, or it’s more in maintenance mode? So, there’s a lot of different things that we can look at fairly quickly and usually come up with several thousand dollars worth of tax savings for the average business person.
Josh: Well, that’s pretty impressive. I bet they would even like that.
Diane: They would.
Josh: So, are these all the things that you would review or is there other things that you think are important for business owners to be looking at?
Diane: Those are where we just get started. It’s with those types of things. And then once I get in deeper into the whole taxpayer situation, then there’s quite a few other different areas that we can dig into. But I try not to get too technical on these kind of calls because I don’t want to put anybody to sleep and have them, you know, have a car accident or something because we got boring on them.
Josh: Oh, I don’t think that will happen because our listeners are very active and interested in how they can minimize their taxes. Or, at least, I’m going to bet they are because they’re probably like everybody else who I’ve ever talked to.
Josh: So, when you help people go through their taxes – and this is something that comes up with me a lot. I’ll have a client call me up in November – usually right after Thanksgiving or the second week of December, and they’ve realized they’re having a really good year and they want to go out and spend some money on something like a vehicle which they probably don’t need or an expensive piece of capital equipment, which again, they probably don’t need but they’re looking for a tax deduction. What’s your advice when somebody calls you with that sort of question?
Diane: My advice, generally, is if they really don’t need it, don’t spend the money because there’s other areas that you can invest that money in like maybe looking at the retirement planning side of things. Maybe they haven’t fully funded whatever type of plan they’re in. Maybe let’s look over there and see if we can fully fund a retirement plan which is something that’s going to put money back in their pocket down the road, instead of buying a piece of equipment or a vehicle that they really don’t need.
Josh: So, when we get into retirement plans, which happens to be one of my specialties, t question I always ask people is “what type of plan do you want?” My question is how much money would you like to save?
Diane: Correct, mm-hmm.
Josh: And the reason for that is we can go anywhere from a thousand dollars up to a couple of hundred thousand dollars, depending on the type of plan. So, when you’re saying, you know, “don’t spend the money on that vehicle, put it into the retirement plan.” You can’t do that with every plan that exists out there. But there are some plans you could. What type of plan, if you come–
I have an extra $30,000 or an extra $40,000 which I was going to go buy a vehicle with. I call you up and you say, “Hey, don’t do that. Put it in your retirement plan.” What type of plan would I need in place to be able to do that?
Diane: Well, if we’re talking in November, it’s too late to run down and open a SIMPLE. And a SIMPLE wouldn’t allow you to put that much money away in it. So, hopefully you already have a 401K open or were able to get a 401K open and allow you to dump that money in there.
We might even look at a SEP, depending on the profitability of your company. If your profit’s high enough, we could get potentially drop it into a SEP which allows us to make that contribution all the way up to April 15th of the following year. So, then we finally have really, you know, real tax numbers and data to work off of. So, we have some options. It’s just getting those plans, getting them up and opened and don’t procrastinate and not get around to doing it.
Josh: But if I’m going to put away $40,000 a year, is a SEP the best way for me to go?
Diane: Not necessarily. Yeah, probably moving more into the 401K arena.
Josh: Or even the 401K, I can’t put $40,000 in.
Diane: I believe the maximum is like $54,000.
Josh: Mmm, not with a 401K.
Diane: With a Safe Harbor 401K?
Josh: Safe Harbor, possibly.
Diane: Because I’ve got a couple of clients that we maxed out right around that point every year for them.
Josh: Yeah. I would if I would be flicking that a—what’s called a Cross-Tested Safe Harbor Profit-Sharing and 401K Plan which gives the owner more flexibility in what they’re going to save every year.
Diane: Right, right.
Ultimately, what we’re trying to do give that owner the maximum savings. But if you do have employees, then we also have to cover them. But we also want them take a maximum advantage for the owner.
Josh: And so, here’s a question I always like to ask people, which you just brought up a great point, so let’s talk about this for a second. Is that employers often say to me, “Well, I want to put away $40,000 for myself but I really don’t want to put anything away for my employees.” So, my comment to them is, “Okay, if you’re going to put away $40,000 for yourself, then just save it in a taxable account. You’re going to need to earn pretty much close to $70,000 to be left with $40,000.”
So, if I put away less than $30,000 for your employees, you’re ahead of the game. Your employees are getting their free benefit and you’re saving $40,000. Every time I present it like that, the owner says, “Well, let’s go do that because I’d rather give my employees some money than give the Federal Government some money in taxes. Does that make sense to you?
Diane: It does. Plus, if you’ve got a really good team of employees, it helps to create that lifetime value or that long-term value of those employees too because they see that you’re completely vested in their future, not just in your own.
Josh: So, let’s have a short conversation, because we just have a few minutes left, around people making business decisions based on taxes versus making business decisions based on what’s right for the business.
Josh: Do you ever have that conversation with your clients?
Diane: Yes, I do.
Josh: And what might that conversation go like?
Diane: Sometimes they’re not really happy with the outcome because they tend to look at the short term instead of the long term. And we’re always wanting to make decisions that will benefit that business in the long term. If we can save some tax along the way, then that’s frosting on the cake. But we don’t want to make a tax-only decision that will hurt that business in the long term, or hurt that owner, or whatever – hurt their retirement plan, or hurt them personally in the long term. We want to build that business up so that it is definitely sustainable and that it’s going to be here for the long haul.
Josh: So, one of the things that you talked about is how to make your business stand apart which really doesn’t have a lot to do with tax planning. But how do you go about increasing the lifetime value of your clients? And first of all, what does lifetime value of clients mean and how would you go about increasing it?
Diane: Well, the lifetime value of your client has to do with how much that client is worth to you over the average number of years you would expect that client to stay in your business. So, for myself, the lifetime value of a client might be $20,000 or $25,000. So, by the time we figure in their income tax returns, maybe a little bit of bookkeeping, some tax projections, that type of stuff. And my average client stays with me between 15 and 20 years, so I’ve got a pretty long lifetime average there. So that’s how you would look at what is the lifetime value of a client.
And then helping you stand apart from your competitors, I’ll use my own business as an example. Prior to becoming a certified tax coach and starting to specialize in proactive tax planning, I was just like every other accountant out there, doing the compliance work, kicking out financial statements, preparing income tax returns – just the normal stuff.
Well, the recession hit and I needed a way to stand out from the other million accountants across the U.S. and be able to make an impact on my clients’ lives because fewer of them had a lot of discretionary money at that point in time. And so, that was part of why I became a certified tax coach and now have the niche of specializing in proactive tax planning.
And by doing that, our sales are up this last couple of years. My staff levels are up. We’ve actually employed a couple more people. We’ve got clients across the U.S. that are thrilled with the amount of money we saved them. We’ve cumulatively saved $817,000 and that number’s going to go up substantially here in the next couple of months as we finish off some more planning for a few clients.
And so, it’s completely changed the way we do business. It allows me to stand apart from other clients and we’re making more money in our own business. So, I know if it works for me, it works for other types of businesses as well.
Josh: Well, that all sounds like pretty good stuff. So, I’ve one more question for you which I find just really kind of amusing but I’ll have to ask it so, why is selecting the right tax professional like dating? And we’ll end it there.
Diane: Well, Josh, there’s so many different accountants out there. There are just probably hundreds of thousands if not, you know, more out there, scattered across the U.S. And we know that certain people’s personalities match up better than other people’s do. And so, we always say, “When you’re out there, looking for a new accountant to work with, you want to find one who has similar view points as you do.”
Just like when you’re out there dating somebody. You want to get to know them a little bit. And then maybe try some stuff. Have some conversations. Ask some questions.
We do give away a little special report about that on my website where you can find out what questions should you be asking. You want to make sure. “Is this accountant entrepreneurial?” Because if you’re a very entrepreneurial business owner and you’re with an accountant who’s not entrepreneurial, they’re not going to understand some of the risks and challenges and stuff that we face as a business owner. And they’re also not necessarily going to be proactively looking for ways to help you grow your business, help you stand apart from your competitors, help you save money on your taxes. Where somebody who’s more entrepreneurial will have those tendencies and you’ll match up better and you’ll be a better fit in the long term. So that’s why we say, selecting an accountant is a lot like dating.
Josh: Or selecting any professional is a lot like dating.
Diane: Yes, it is.
Josh: It’s not just accountants. We could say that about everybody.
So Diane, unfortunately we are out of time right now. And I know the people who are listening are going to want to have a chance to talk with you about what you do or how you might think about their business. So, if somebody wanted to find you, how would they go about that? And you mentioned some free stuff on your website. How would they get that?
Diane: Well, the best thing for them to do is go out to my website which is www.taxcoach4you.com and we use the number 4 in there. And on my website, we love to give away free copies of my books. And we have one called “The 10 Most Expensive Mistakes That Cost Business Owners Thousands.” And we love to give that book away. We give it away constantly.
I have another one of my books called “STOP Overpaying Your Taxes: 11 Ways Entrepreneurs Overpay and How to Stop It Now.” We give that one away. That one, we do charge postage because it’s a little bit bigger book and it costs us a little bit more to mail it. But we give those resources away all the time.
There’s some money-saving little bundles of information out there. So, we’re just in the business of if giving away free information and trying to get people educated on ways that they can start saving some money on their income taxes. And then in addition to that, we will follow up with offering a free tax analysis where we’ll take a look at their last two years’ income tax returns and see if we can come up with some ways to save them money.
Josh: Okay, great.
Hey, Diane, thanks so much for your time today. I really appreciate it.
And I also have an offer for you which is our one-hour free audio CD course on how to take your successful business and make it sustainable. On the CD, I talk about the five things all sustainable businesses have in common. And it’s absolutely free. All you have to do is take out your smartphone, which I know we all have, and text the word SUSTAINABLE to 44222. That’s the word SUSTAINABLE to 44222.
And you’ve been at the Sustainable Business. This is Josh Patrick. Thanks so much for stopping by today. I hope to see you back here really soon.
Narrator: You’ve been listening to The Sustainable Business podcast where we ask the question, “What would it take for your business to still be around 100 years from now?” If you like what you’ve heard and want more information, please contact Josh Patrick at 802‑846‑1264 ext 2, or visit us on our website at www.askjoshpatrick.com, or you can send Josh an e-mail at firstname.lastname@example.org.
Thanks for listening. We hope to see you at The Sustainable Business in the near future.