Tax Strategies

I’m Dawn Kennedy, your host of the Profit Accelerator podcast. I’m an attorney, author, mentor, and CEO of a growing coffee company. Thanks for joining me on the show that looks at all aspects of business from the mindset to the sales to the money left over at the end of the month with tips and strategies to help you navigate this amazing ride called entrepreneurship.

Thanks for making us part of your journey. Hello and welcome to this episode of the Profit Accelerator podcast and we are going to be talking about money again, since that is something that we like to do here, but we’re specifically going to be talking with an accountant who’s going to give us some ideas about tax strategies and some things to consider in how we navigate this economy and whether or not it’s time to start pulling business credit. So Chase, thank you so much for joining me today.

Hey, thanks Dawn for having me. Can you tell everyone who you are and who you serve? Yeah, so Chase and Sonia, I own Sonia CPA. We’re based in Austin, Texas.

We have a team of about 25 people currently all across the U.S. serving clients, one to three business owners, kind of our main focus. We’re under 30 million out of a general number and mainly focused on certainly do transactional services like monthly or daily accounting and payroll and sales tax. But we use that information for advising and coaching and planning with our clients, doing more tax strategy throughout the year.

So we’re on track for December 31st and just making sure clients are getting as much proactive advice as possible and communicating is the biggest thing we do here in a big push. So we’re constantly making sure we communicate one to three business days in general and making sure clients are getting their answers as soon as possible. That’s amazing.

So I’m going to talk about myself and, of course, other business owners who are probably listening in. A lot of us only talk to our accountants maybe once a year. We don’t think about tax strategies.

We pass off the paperwork and that’s about it. We got the bookkeeper and we got the accountant and the accountant is the professional who prepares and signs things. But it sounds like that may be not serving us very well.

Yeah, I mean, why I started my business back in 2011 was there really wasn’t anyone bridging kind of the bookkeeping for small business and tax together. And those two, in my opinion, are interrelated because you’ve got to keep up with the numbers and you’ve got a tax plan before the year end. Just like you mentioned, you’ve got a bookkeeper.

They’re not incentivized to talk to the tax person that you reach out to in January through March and vice versa. So that’s the that’s the gist of why I started my company to serve that and bridge that gap together. And then, but now we get into, we at least required to reconcile the books.

Half our clients keep track of their data. Half don’t. And we were doing it all for them.

But,  we’ve got to at least understand that the data is clean and what we’re working with to advise and tax plan on it in real time. And so,  we’re communicating with our clients daily, weekly, monthly, quarterly, depending on the size of their business.  if you were like semiannual,  they’re one of our consultants maybe and just need check ins throughout the year.

But we’re big on making sure we’re at least checking in and making sure everybody’s on track. And,  Q4, we do a formal analysis where we’re tax planning or we bring in all the numbers together in our tax software and and estimate the rest of the year and see what needs to be done by the year end. A lot of times people get to March and they’re like, oh, your tax accounts like, oh, you should do this last year.

And it’s too late to then tax plan some things and save money in a lot of cases. So that’s what we’re trying to avoid here. And that’s our ultimate goal is just to be proactive.

Right. So you’ve said the word tax strategies multiple times, and I’m sure there are some listeners whose eyes are glazing over. I get it.

But really, let’s talk about that. If you are a small business and let’s say you’re doing,  five hundred thousand to thirty million or something, you’re established or you’re too old, maybe you’re a smaller local business. Let’s talk about why do we need to strategize for taxes? Right.

So generally you’re sitting here and you’re like, this is what we made and the sales tax is different and was paid and this is what was left over. So what strategies would I even have? As a lot of times we run into,  when somebody on boards with us or we have initial conversations,  starts with the structure,  do they even have an LLC set up?  they’re making six figures. A lot of people don’t even have an LLC set up.

That’s the first step for us,  helping them save on taxes. From there, once you have an LLC set up, we can then talk about S corp election. You can’t save on taxes if you don’t at least have an LLC set up in the tax year you made the money.

And then from there, can we make a late S corp election with the IRS to be taxed as an S corp? So that’s the first step is the entity formation. The second one is obviously looking at the numbers, looking at the financials,  seeing some advisory there. If there’s some ideas that we can make more efficient or like where the money’s flowing.

And then at the end of the day,  what does the business owner want to do with their money that’s left over? So you’ve got reasonable salary and then you’ve got owner draws for the rest of it. Obviously, it’s all your money. At the end of the day, you’re paying tax on it as a Scorp partnership flow through.

And so then it becomes a conversation, OK, is it cash flow for the business needs?  do they have a spouse that is working, not working? Do they have kids that they could hire in the business? Do you want to max out 401k or SEP IRA?  a lot of clients in a higher bracket that are older and,  want to put in six figures as a defined benefit plan. So just kind of having those almost financial advisor conversations like we have about 75 percent of that conversation with our clients, but we’re not a financial advisor. So,  we’re providing that advice to our clients, making sure they’re on track because most of those things I just mentioned, you’ve got to put in place before December 31st and you can’t wait till after the new year and then say, I want to do this last year.

Right. So this,  idea, starting from structure, of course, and going all the way through, there are multiple things that you listed that do need to be considered, which I would say for the average business owner, that’s not maybe well-known information, right? I mean, I don’t think that unless you are specifically looking for tax strategies for some reason that it would even cross your mind that,  you’re a two-year-old, three-year-old, five-year-old business and this is really something you should be doing because it is something that could impact you at the end of the year. So let’s talk a little bit about,  tax strategies and some of the things around this economy right now, growth, taking loans,  how this impacts some of these decisions that need to happen about what you’re going to be doing maybe with your money and how having these solid tax strategies can either leave more cash in your business, less cash in business,  how does this all fit together? Why is this so important, especially in this economy when people are actually maybe leveraging more than they would? Yeah, it’s a good question, especially,  kind of where we’re at today.

I mean,  the Fed’s putting out data on,  what kind of the consumer debt levels are doing and,  it shows that they’re increasing credit card debt, I think I just read it was the highest it’s been since,  higher than 2019. So debt levels are rising,  a recession is potentially looming. We’ll see where that comes, but,  my best, my guess is as good as anybody else’s, but I do follow the markets a lot because I manage my own portfolio.

But,  what we’re advising, what we’re seeing from clients is it depends on your industry that you’re in and serving. The residential services, kind of the personal services, those seem to be decreasing a bit and,  they’re not dropping off. It’s not like we’re in an OA crisis, but there is a decrease that people are holding onto their money or not spending as freely as they were before.

And, and so we’re seeing that in the client’s numbers, the clients are seeing that they’re having to cut back on their end with their vendors or, or contractors or whoever they have. So it’s, it’s starting to kind of slowly creep in. And I don’t want to say full blown worry at this point, but I would, I would categorize it as a growing concern, depending on what industry you’re in.

And then,  you’ve got the other, other part of the spectrum that,  sees no decrease at all. They see more business than they’ve ever had. And,  they see no worry, but in my opinion, I think,  if you’re, if you’re seeing kind of a downtick a little bit,  you maybe want to be a little bit more cautious,  going into the next 12, 18, 24 months and just kind of see where it plays out.

I mean, debt’s very expensive right now. So I would, I mean, I’m advising my clients to be very strategic on taking out debt and making sure there’s a plan to increase business with that debt and, or make yourself more efficient to increase the bottom line. But I wouldn’t, in my opinion, I wouldn’t be taking on expensive debt to,  kind of guess that this extra money is going to,  put extra dollars in my pocket at the end of the day.

Right. Does that where you’re at? Does that change some of the conversation around these tax strategies and what we need to be watching out for? Yeah, absolutely. I mean, and,  I mean, that’s why we’re, that’s why we advise on keeping up with it monthly because we can see these trends happening in real time.

And,  if you’re waiting till 12 months from now, I mean, it might be too late. And the perfect example is,  like if you’re an S corp and you’re selling a reasonable salary and you’ve got, you’re in a business that’s dropping, you don’t want to keep paying this high reasonable salary. I mean, the goal of an S corp is to just pay a quote, reasonable salary based off your net profit after expenses.

So that’s what we look at monthly. Like, should we pause payroll for the owner? Just maybe take more owner draws. You can always catch up payroll at the end of the year if you need to.

And so that’s kind of one of the things,  we’re advising our clients on as we look at the numbers monthly and reconcile and send them out just make sure they’re on track and not wasting unnecessary payroll taxes. Right, yeah, you know what, that’s a great point. Payroll taxes, we do have to pay those, don’t we? So there can be strategies around things like payroll.

I don’t, until you just said that, I didn’t even think about the fact that I think the company is paying what, 7.65% or something of payroll taxes, I think is the base, right? Yeah, I mean, you got the employee and employer. So, I mean, if you’re a one-owner S corp like me, you’re paying 15.3% payroll taxes at the end of the day. That’s something you want to avoid that,  it’s money you’re never going to get back once you send it in.

Right, yeah, no, this is a really good point, especially with,  again, the way things are going, I’m with you. I don’t think it’s time to panic, but I do think that if you are not somebody who typically looks at the numbers regularly and I can speak for a lot of people that generally they pass it off, they don’t necessarily look, they’ll look at the P&L, they’ll see things are okay, and then they’ll kind of like maybe not dig much deeper. I think that that’s pretty common for a lot of business owners, particularly those who,  they’re very creative or they have a skill or something where this just doesn’t fit into their,  likes, right? They don’t necessarily like doing that.

Yeah, I think this is a great reminder that these things do have some flexibility in them. Like you said, if you lower your check, you’re going to lower your taxes that you cannot get back. That is an interesting perspective.

I don’t think that people really think about. And another,  another avenue to look at, too, is, I mean, you can look at Topline and say, oh, well,  I’m still making the same revenue or my bank account,  has the same amount of cash. But,  what we delve into on the advisory team side of it is,  my team’s looking at metrics and percentage of revenue costs.

I mean, everybody’s costs are going up, insurance, rent,  you name it. I mean, in this inflationary environment, your costs are going up. And so it’s really looking at margins, too, because,  you may be making the same top line, but at the end of the day,  what is your gross and net margin as your costs are increasing? So do you need to look at increasing prices with your lines of business? Do you need to look at renegotiating some contracts with your vendors, maybe, or look at,  cutting some unnecessary costs from your P&L that,  is maybe a little bit of fluff or streamlining your labor and maybe outsourcing some pieces where you maybe have full-time people now and cut those costs a little bit.

So all these little dials,  we’re constantly looking at and,  talking with our clients with and getting a sense of where their business is going and just having this kind of business type coach conversation or advisory conversation. So,  they at least have a resource to talk about it with, because to your point, it isn’t their forte. I mean, that’s why our clients are here.

that’s why they come to us, because they’re looking for this expertise. So we want to make sure and provide that value to our clients and keep track of this stuff, like it should be kept track of, especially in an environment like we’re in.  your margin percentage is really what you want to focus on.

Right, right. So I have a note here that we talked about when we were doing the podcast chat, and there’s a note here that says something about 85 percent of businesses don’t sell. And I think we had kind of tied that back to the idea that building the business and just trying to sell it as a retirement plan or windfall is probably not going to be a good idea.

And I think it’s timely in this economy a little bit that maybe people aren’t going to be rushing out to purchase businesses, even if they’re well established. I want to talk to you a little bit about that, the idea that businesses actually don’t sell maybe the way that we expect them to, even if we make it through rougher economic times, come out on the other side and still exist. Good question.

That stat comes from Forbes, I believe, where 85 percent of small business never sells. And,  our philosophy, my philosophy has always been with my clients and when they come to us here is just save something annually so that at the end of the rope, and this is what I do for my own self, save money annually so that at the end of the rope, whatever that looks like, you’re not trying to buy or sell your business and hope that you get a number for all the blood, sweat and tears you put into it over the course of time. Because if that’s if that’s what you’re hoping on.

the reality is it’s never it’s not going to happen or it’s not going to be the number that you’re looking for to that statistic. I mean, 85 percent never sell. The other 15 percent get lucky.

And what does that number look like? So my philosophy has always been as you’re growing, as you’re scaling or just maintaining,  put money away for a rainy day and that way at the end of the rope, like for me, if I had ever decided to sell my business or merge or whatever that looks like, it’s almost like a golden egg where it’s almost a bonus for me. So I don’t necessarily need the business to sell in order to retire or move on.  I’ve built up over the course of time and running this business, a wealth.

Building strategy and contributed to my accounts annually and like I said, a man in my portfolio, so,  I’m constantly investing that money, but I also have 15 rental properties, so it’s very diversified for me. But whatever you’re interested in, at least be building some type of wealth along the way, because a lot of people just get focused in re-contributing all their capital back into the business and just trying to keep growing and growing and growing the business and that’s great, but you’ve got to have a balance there in my opinion, because at the end of the day, you don’t want to look back and be like, I should have put some of that away and not invested all of it. And so that’s kind of, that’s what we’re trying to make our clients aware of.

Now, do they listen to us most of the time? Probably not, but we’re trying to get them to save something, at least minimum do an IRA annually,  and then from there, how much do you want to save or put away? But that’s our base philosophy of what we’re promoting on the wealth side. Right. And again, this rolls all the way back to those tax strategies, those having those conversations, looking at your numbers and understanding,  what you might need to do.

And I guess the, I want to say that the key lesson here, at least for your clients and hopefully the listeners is don’t get blindsided, right? Yeah. And,  I mean, there’s obviously a business, I mean, I started out, we started in 2011. I never paid myself for two years.

I struggled,  to get it going. And so,  we understand the phases of business. So,  we’re not saying if you’re a young business to talk about tax planning and wealth building yet.

For the most part,  you probably want to build up a reserve account and short-term savings. I mean, at least you’re earning 5% right now. And then,  put these buckets of money together as you’re scaling.

Maybe,  like we have a lot of health care workers,  that are 99 contractors in these hospitals and,  they have a ton of student debt that they’re coming out of. So,  we’re recommending, OK, we’ll put some money in a reserve account for rain,  in case you need it. And then also pay down this debt before we even get to a tax plan, retirement conversation and building wealth because the student debt’s never going away.

So it just depends on the phase. But,  once you get out of that, once you kind of turn that corner and,  if you’re like an e-commerce, which we have a big vertical in,  now you’ve turned a corner and you don’t even need that line of credit. You’re almost lending to yourself to buy your inventory.

that becomes a different conversation than,  when you’re just starting out and trying to borrow a hundred thousand dollar line of credit to buy inventory to sell it in Q4. And then you’ve got,  you’ve got that inventory cycle of cash flow that you’re struggling with. But eventually those clients turn a corner and they start borrowing and get this themselves.

And then from there,  now they’re now they’re that’s that’s wealth generation. You can start talking about having that conversation. Right.

I mean, I love this, though, because the. I guess the trajectory is very unique to every single business, but even though everybody’s journey might be a little bit different, having these conversations about thinking long term and milestones that you should be considering again, I’m going to tell you that most people talk to their accountants once a year. I’m guilty of that myself, actually, where,  it’s like, OK.

We got all everything we need. Here you go.  it’s March 14th for a corporation and then,  personally in April.

But otherwise, I mean, this is a conversation that I think needs to be had. And if you are listening and you are not necessarily getting the guidance that you need, I would encourage you to to sit with this and think about making that change, because, again, the dynamics of business and how the things are changing right now, I think having those regular conversations really can save you a lot of money is what it sounds like. Yeah, that’s the ultimate thing we’re trying to do at the end of the day, I mean, we don’t put people in an escort, for example, until the profit until the savings justifies the cost, obviously, because we’re charging,  extra to follow that business return.

But so, yeah, it kind of goes back to like I always recommend working with a licensed professional.  I like to warrant clients. There’s a lot.

I mean, we get it all the time. There’s people out there giving advice to people that aren’t licensed professionals and they’re not the one signing your return and they’re not.  they’re making all these.

Statements out there like, oh, you can deduct this and that. Well,  at the end of the day, we’re also responsible with our name on your tax return. So ask them,  do you want to put your name on their tax, on your tax return by making these statements? Because likely they don’t.

And so,  working with a licensed professional provides that assurance, like a CPA that provides that assurance that things are being done correctly. Obviously, the state board requires us to be independent and make sure that we’re doing the work properly. And we certainly don’t want our professional liability hindered because,  we’re being ultra aggressive and,  raising red flags with the IRS.

That’s the last thing we want. So just be cognizant of,  who’s providing that advice on TikTok and,  and check with a licensed professional first before you move forward with anything. Yeah, this is great.

So where can people find you? Because it sounds like you do work nationally, so anybody in the audience can probably reach out to you to get some support. So how can everybody find you and where should they connect with you? Yeah, thank you. And,  most people aren’t aware that CPAs, unlike attorneys or insurance or financial advisors, CPAs have reciprocity in all 50 states, which means,  we’re based in Austin, but we can file in all 50 states without being registered or licensed in those states.

So in California and New York are second and third largest state filings because everybody moves to Austin from those states. But, yeah, feel free to reach out to us. You can reach us on our website.

Insognacpa.com, I-N-S-O-G-N-A-C-P-A.com, and we’ll reach out to you immediately. I have,  I have a team of people here, so it’s not just me,  waiting to hear from me. But you can always call our office, too.

Somebody’s answering the phone,  we’ll get in touch with one of our team members, have an initial conversation,  just kind of understand what your needs are, and then from there, see how we can help you. Amazing. So we’re going to put that down inside the show notes with a link.

So if you’re listening to this on the day it releases or a year or two later, you can still find Chase and the CPAs he works with. And thank you so much for this conversation. Thank you, Dawn.

I really appreciate it,  and I appreciate,  your honesty about kind of where we are in the business landscape right now. I think having,  the courage, I guess, to say, hey, listen, we’re telling people not to take on,  expensive debt right now or whatever. I think that that is something that maybe a lot of people are not getting information surrounding,  from TikTok, for example.

So thank you again for having me. Yeah. Yeah.

Great conversation. All right. I’ll talk to y’all next time on the next episode of the Profit Accelerator Podcast.

Take care. Thanks for tuning into this episode of the Profit Accelerator Podcast. If you want some more information about me or free resources, please visit my updated website, DawnKKennedy.com. Follow me on social at Dawn K Kennedy XO on Instagram and on Facebook at Dawn K Kennedy Mentor.

I’ll see you next time.