Financial Foundations

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Boost Your Small Business With These CPA-Approved Tax Tips

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TRANSCRIPT:

And it really does tie together the long-term planning and goals function too, right? Because you can eliminate your self-employment taxes all day long, but at the end of the day, what you’re doing is now you’re not paying into Social Security as much. So if you’re not effectively still saving that and investing that excess tax savings, you’re really kind of doing yourself a disadvantage. Welcome to the Financial Foundations Podcast, your gateway to the fascinating realm of finance, brought to you by Base Wealth Management. In this show, we delve deep into the world of money, guided by seasoned experts who will unravel the complexities of finance and provide you with invaluable insights and practical advice. Now, here are your hosts, Dustin Taylor and Alex Wolfe. Welcome back to Financial Foundations, brought to you by Base Wealth Management, where we are the foundation to your financial plan. I’m your host, Dustin Taylor. I’m your co-host, Alex Wolfe, certified financial planner. And today we have with us a member of the Base Wealth team who is a CPA who works typically with small business clients, and that’s Josh Pisa.

Thank you for joining us, Josh. Thanks, Dustin. Welcome, Josh. Good to be here. Yeah. Thanks for joining us. So the first thing that we want to talk about is how you got into the industry and why you like working with small businesses. Yeah. So went to school for accounting, loved my tax classes and just starting to learn about how to save people money, how businesses work, understanding why businesses do certain things financially and the fact that there are options and opportunities and strategies that us as professionals can utilize to save people significant amounts of money and help point them in a direction to better their company and then ultimately provide something valuable to them as the owners at the end of the day. So really looking at the whole picture of somebody starting a business, running a business efficiently, making money, making profits, investing, and then what they end up doing at the end of the day to help them meet their goals. So I really like that idea of working and making an impact with people to help them reach their goals. What are some of the most common mistakes that people make with their small business when it comes to taxes? Organization is a huge one for small businesses or startup businesses, just not being organized, not tracking money, what they’re doing, not having good books and records. Like expenses and things too? Expenses, yeah, like a lot of times you’ll see businesses and small business owners, they’ll use a personal credit card, a personal debit card. They’ll just commingle funds. They’ll not keep any books and records at the end of the day. They’ll put a bunch of receipts in a box or in a folder. They don’t even have monthly financial statements in a lot of situations, so they don’t know maybe what’s going on really in terms of profit and expenses throughout the month. Rather, they simply look at a bank account balance to help make decisions, and obviously that’s really not an effective approach to running a business. Choice of entity, so in terms of how they elect to be treated for tax purposes, services can make a huge difference.

Do you want to talk about that? Yeah. Yeah. Common practices and what maybe you recommend for certain types of businesses?

Yeah. So a lot of it’s dependent on the phase of the business that the person is in, how big the business is, what types of services they’re providing, whether or not maybe they’re even in a service business or a manufacturing type of business. So it’s really going to be dependent on the particular situation. But generally speaking, what we look for when we’re doing an analysis is can we optimize them in any way or provide them any other tax savings or flexibility in terms of meeting certain needs of the business, right? So as an example, we recently had a client who, it was a single owner business, I think she was a nutritionist, came in and was working with a CPA, wasn’t really doing any tax planning, had a really nice business going, was earning six figures in profit after expenses and was running this through Schedule C as a sole proprietor. So from a tax perspective, the obvious option is to look at doing an S-Corporation for this individual. And then the benefit there is that any of the excess profit of the business is not subject to self-employment taxes. So in her case, there was a considerable tax savings in terms of the self-employment taxes.

Now there are definitely some nuances with going down that road that people should understand in terms of you still do need to pay yourself a reasonable compensation. You can’t simply have it all be deemed a shareholder distribution, not subject to self-employment taxes. So that was a big one and an option for her that made a lot of sense. And there are situations out there too where it’s not the be-all end-all that everybody should be doing this, right? It really needs to be looked at and then considered and talked through like the type of business, what they’re doing. Like for an example, generally real estate investors and things like that, it doesn’t make sense to set up as an S-Corp. There’d be other options for that.

So yeah, just that’s a really good one for folks who are running a small business and maybe not working with an accountant or somebody who’s actually doing any sort of planning. And then for her particularly, we were also able to layer in a simple IRA account on top of that. So part of what we deemed as a reasonable compensation that would then be picked up as W-2 income could now be reduced down by the contributions that she could make into her simple IRA. So it was really a way to layer in a couple levels of tax savings in terms of the savings from self-employment taxes, plus the savings from the deferral of the simple IRA contribution. Yeah, I think that’s interesting. I’m glad you mentioned it. One of the big missing pieces when I work with someone who’s self-employed or owns a small business is the retirement planning piece. And a lot of them don’t even have any type of retirement plan set up for themselves or their employees.

So what do you think about how you handle that situation?

Yeah, I love it. I mean, that’s definitely a go-to for us because that brings us to that piece where we have tax strategy, tax savings, but now we can layer in the retirement planning piece and it really does tie together the long-term planning and goals function too, right? Because you can eliminate your self-employment taxes all day long, but at the end of the day what you’re doing is now you’re not paying into Social Security as much. So if you’re not effectively still saving that and investing that excess tax savings, you’re really kind of doing yourself a disadvantage, especially if you’re just spending it. So tying it together with a retirement plan and helping them understand the long-term benefits of saving this money is really the ideal on that piece. Yeah. I’m going to skip forward a minute here and Dustin, bear with me. Talking about retirement planning and linking everything together, what about succession planning where you’ve got someone who, regardless of what type of retirement plan they implemented or didn’t implement, how do you work with clients who are looking to sell the business, whether it be to a family member, an employee, or someone they don’t know.

Yeah, a few different things, right? So I think that kind of goes back to the, like, let’s make sure we’re running an organized business, right? Where we have accurate books and records and what you say on the financial statements is actually happening, right? And you’re not just putting journal entries in for things. So getting them organized where bank accounts are reconciled to your books, you have clean financial statements. So obviously that’s going to be one of the first things that like a serious qualified buyer is going to look at, right, is tying out your numbers and stuff, reviewing tax returns if they’re not a prior client to make sure they’re accurate. In terms of the retirement planning and that type of thing, conversation, and that’s more of a, I think, an added benefit to say, like, I’m running a business that’s offering good benefits and maybe that helps with employee retention. And looking at most CPAs, or like if you go to H&R Block, stuff like that, they’re concerned with taxes for this year, but for you, you’re also a financial advisor. So do you also look at lifetime taxes whenever it comes to the small businesses? Is that still relevant?

Yeah, I mean, so it’s just, it’s, there are options that we look at and, and there are probably more specific meetings that we have with clients that cover and touch on certain strategies that are long-term planning focused, right? So obviously the retirement planning conversation is, is one of those. Roth conversions can tie into to that conversation too, if folks have large pre-tax IRA accounts. And depending on their level and trend of income, like we kind of want to understand like that, those trends to see if they’re just on a straight upshot of profit and taxation, you start to not become as concerned with the Roth conversion piece. Cause maybe they’re, they start to become in a higher bracket now. And, and in the long run, maybe they would, after they sell the business and that kind of thing, maybe they come back down to a lower bracket. So maybe it doesn’t quite make sense, but yes, those are all things that, that were definitely looking at long-term.

And for someone who’s a sole proprietor and they’re trying to make the decision on whether they should be an S-Corp or not, one thing that I saw come up was the fact that it could affect Social Security because you’re you’re getting a lower salary. Is that true? Is that how that works if you’re getting a lower salary because of your S-Corp? Is that gonna affect your Social Security in the long run? Yeah, for sure. So that’s what we were kind of saying like where if we if we do go down the route where within a Schedule C, in the example that we were talking about with with the lady prior, her full profit was being paid in basically up to the Social Security max which is like a hundred and sixty thousand a year into Social Security. So has she, does she stay, if she stays on that track she’s gonna have a larger Social Security benefit because she’s every dollar of profit that she makes is being paid in towards that, right? So with with the S-Corp strategy layering in maybe we pay her a $40,000 salary instead and the other $70,000 is now not being paid in towards her Social Security benefits. So that certainly will work towards reducing her credits in the long run and ultimately the amount of her benefit. But what she needs to understand then is there’s some amount of that $70,000 that now is a shareholder distribution that should be going towards funding retirement and long-term planning, right? Yeah, so if you figure you’re paying 6% or 7% towards Social Security on those taxes, you want to kind of divert that amount at least into the long-term bucket. Do you find that in any sort of analyzation that if they did put that money in now, then by the time that they were drawing Social Security that it would be more given the average market?

It probably depends what rates of return you’re using, but certainly if you use the more recent rates of return, you would definitely outpace what you’re going to get from Social Security on that piece for sure. And then another question too, for that same person, I know that you handle the tax returns for the business owner, whenever you do that, you use a software like Holista plan or something to kind of find bracket management. Yeah. So what, what are maybe some common things that people would miss that Holista plan catches? One of the big ones too, I guess, when you’re looking at Roth conversions and depending on the age of the person can be in, and one of the sweet spots for Roth conversions is folks in like in their sixties and maybe they’re stopped working, but they’re not yet at RMD age, right? So, and, and they could be potentially taking social security already, taking, paying Medicare. So obviously the big one is if you do a Roth conversion, depending on the dollar amount of the conversion, and you look at that in conjunction with the Medicare rates that you pay based on your level of income. So if you do a large conversion with somebody and they’re, they’re paying Medicare and their AGI goes up considerably, they could be bumped up. One, two or three brackets in terms of their Medicare payments. And then that can be substantial. And there’s a look back period too, isn’t there?

Well, it’s on like a rolling two year kind of period, right? So it’s like whatever the most recent return that’s filed is will drive your Medicare the next year calendar year. So it takes a couple of years to catch up. But, but yeah, that’ll be one that holistic plan will drill down on and look at and help you kind of figure out and optimize like, okay, let’s make sure I’m not bumping up into that bracket too. The other one can be net investment income tax, which is a surtax of 3.8%. So depending on how much we’re converting and other sources of income, and the amounts and things like that, we can bump up into paying that extra 3.8% net investment income tax, which would layer on top of the ordinary income tax. So ideally, we’d want to avoid that piece of it as well.

So the holistic plan is great with graphs and charts and increments and things like that, that we can play with that will help us stay out of those buckets you using a holistic plan for mostly like retirees and how to create your own tax bracket from an income strategy like how much to take out of an IRA versus a Roth IRA versus a brokerage and being able to maintain like a super low tax bracket but also being able to take in say almost $100,000 but most of it is tax-free. So you can do that if you leverage the capital gain buckets, right? Yeah, so if you’re a married couple there’s a 0% capital gain bucket which goes up to like maybe $90,000 or something, right? So if you can keep your AGI under $90,000 and the bulk of its capital gain income then you that effectively is taxed at 0% but that’s a little bit tricky. A lot of retired people have pensions and the high 5% money market rates that are being paid there’s quite a bit of ordinary income that generally retired folks will have that’ll end up kicking you out of that.

Right. And along this track of not necessarily like small business owners or self-employed people, but with the standard deduction being as high as it is, and you maybe not necessarily get into filing a lot of personal tax returns, but it’s very hard to itemize. Is there any anything there behind those layers that people are missing or you think that still people are just taking the standard deduction? Yeah. I mean, that’s the default for most people who are just working a job, so to speak. Where you’ll see it is you have a decent sized mortgage and you’re paying mortgage interest, real estate taxes. We see it quite a bit in the area that we live in. The mortgages generally are a little higher. The property taxes are higher. Healthcare costs? Healthcare is the tricky one unless you’re paying considerable amounts to medical sources. There’s hurdles and things like that that end up being pretty tough to get over for So it’s basically going to be really your real estate taxes, your mortgage interest and charitable giving sorts of strategies with charitable giving, depending on what the person is into, especially if they’re IRA, RMD age, you can look at QCDs, you can look at different things, you can potentially look at staggering deductions, like doubling up. Bunching deductions. Bunching, yep, exactly. Deductions, property taxes, things like that, into a year.

You can do like two years worth in one year. And then skip a year, exactly. Right. Yeah, so there’s stuff like that. Yeah, we’ve done that before. Yep, so that’s always a good one to look at, just depending on the person and the situation. Working with small business owners primarily, I know you’re not like in the healthcare space, but do you find a lot of them have healthcare plans where they’re able to contribute to HSAs and take advantage of the tax deferred nature of those? Not so much, but that is a great benefit, great option that we talk to people about. If they have a growing business and they’re looking to add in features and benefits to their benefit plans, that’s always a great one that we can talk to people about. And then the business owners of it to the extent they can take advantage of it.

And it’s great for the employees because it’s kind of this like triple tax deferred account, so to speak, where you can get money in there, let it go tax free, and then use it for medical. In 2026, we have the Tax Cuts and Job Act set to sunset if it doesn’t get extended or new legislation passed. How will this affect either your average household or small business owners? I guess with small business owners, one of the biggest ones is the QBI deduction or Qualified Business Income deduction, which basically is for businesses that qualify a 20% reduction in taxable profit, right? So that is set to expire, which would be a meaningful increase in tax if not extended. And then ultimately, all that flows down to the individual level where tax rates are set to increase incrementally above what they are currently. So just higher tax rates in general, and then loss of QBI deduction will certainly be a big one for business owners. Politically speaking, and I want everyone’s opinion, do you think that that will get extended or there’ll be new legislation passed because you have people on both sides of the political spectrum in Congress and the Senate, etc., that they’ll be affected by the sun setting as well?

Yeah, I think so. That’s always the balance that we are yet to see. So I think it certainly drives the economy to have business owners keep more of what they make and be able to put more back into the economy. So I think it’s, we’ll see. Yeah. Yeah. I think that parts of it will stay, but parts of it will go. That’s my prediction. Okay. So that wraps up this episode of Financial Foundations. Thanks again for joining us, Josh. You can check out his website at basetax.cpa. As for us, if you need other resources about wealth management, you can check out basewealthmanagement.com, subscribe to our YouTube channel, or subscribe to this podcast. Also, if you have any questions.

or topics you want us to cover on future episodes, you can send those in to us at question@basewealthmanagement.com. I’m Dustin Taylor. I’m Alex Wolfe. And happy listening. We hope the expertise shared by our hosts, Dustin Taylor and Alex Wolfe, has left you feeling empowered and informed. If you’re eager for more financial wisdom, don’t forget to subscribe, rate, and share the show with your friends, family, and colleagues. Until next time, stay sharp in the world of finance.

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