Helping eCommerce Business Owners to Build Wealth While They Build Their Business

I’m Tanner Scott and you are listening to Ecommerce Secrets to Scale. If you want to scale your ecommerce business, you’ve come to the right place because this podcast is all about hearing stories and strategies from successful entrepreneurs and ecommerce professionals to uncover scaling secrets that will have a huge impact on your online store. This week on the show, Chase Insogna from Insogna CPAs joins me to talk about some tax strategies that you can use for your ecommerce business.

This one is for all of you business owners running an online store, but it’s also just as valuable for those that might be thinking about starting their own ecommerce store as well. If you’re looking for some tax strategies to help your business pay less in taxes, stick around for this week’s episode. Welcome to the show, Chase.

I’m really excited to have you. Tell us who you are and what you do. Yeah, thanks for having me, Tanner.

I appreciate it. Chase Insogna, I’m the founder of Insogna CPA. We’re based in Austin, Texas.

My team’s all over the country. We’re a tech-savvy CPA firm, started in 2011, mainly focused on business owners, helping them with full-service accounting, advisory, fractional CFO, taxes, tax planning, building wealth. Currently, I have 20 people, great team members, helping our clients every day with their monthly ongoing CPA needs and timely communication.

That’s who we are. Awesome, man. Did you work for a firm prior to starting your own firm? Can you tell us that story? Yeah.

Going all the way back, I graduated in 2002. I’ve always loved business and entrepreneurship. I’ve always loved money.

As a small child, my parents would tell you stories. But I just like helping business owners. I always did QuickBooks and taxes on the side for people when I worked full-time jobs, graduating and working in corporate accounting and different things.

I finally became licensed in 2009 and never really thought about starting my own firm until then. Then in 2011, I got the opportunity to just get started with my own practice. We’re in the same location we’ve been in for 11 years now.

At that time, nobody was bridging small business accounting and taxes together. They always were separate relationships. That’s the niche that I found in the marketplace at the time, 11 years ago.

That’s how I got started, was just bridging that conversation together. Let’s keep it all under one roof, because it all basically relates to each other as far as the numbers and tax planning. So what was that like for you, jumping in with both feet and starting your own practice? What were the initial struggles that you had? Yeah.

Cash flow, obviously, was the biggest one. I’m naturally conservative as a CPA, as the nature of who I am, but I probably would have trusted my gut and started my business sooner if I look back on it. I think for me, I didn’t pay myself for two years.

First, when I started my business, I struggled with it very frugally and just built it up to what it is today. But the best thing, why we do what we do and communicate cash flow with our clients is because it’s based off my experience. I’m just trying to put myself and my team tries to put themselves in their shoes.

I have always approached it as, if I were you, what would I be doing? So for here, when they come to me and we have a conversation, here’s 10 things, whether they work with us or not, in the conversation, I’m like, this is what you should be doing. Some people are like, well, I don’t know. I don’t trust you.

And I’m like, well, that’s what I would do. So take it or leave it. But that’s really what my approach is.

I’m just kind of straightforward. Based on all of my 20 plus years of experience and dealing with a lot of different businesses and a lot of different situations, bring all of that together in the conversation. And here’s the checklist, take it or leave it.

Yeah, well, I think that’s definitely a good quality and strategy to have. If you’re not going to treat your clients like you would yourself, I think that’s the red flag. But yeah, today we’re talking about tax strategies for e-commerce businesses.

I’m really excited to dive into this. It’s something we’ve never covered before on the podcast. In your experience, what is some low hanging fruit that a lot of businesses are just not noticing and not taking advantage of when it comes to their taxes? I think the biggest thing is really cash flow and then deduction.

So especially when you’re starting out, I understand you want to save money, but I live a personal philosophy of what’s my time worth. And with taxes if you’re using tax software, if you’re using a cheap tax service, you get what you pay for at the end of the day. Because what happens is a lot of the times those people, most of them, and I’ve interviewed a lot of them, have only taken like a six week tax training course.

So do you want somebody who has a career in taxes or you want somebody who’s just doing it as a part-time gig for six weeks? That’s one. The second one, the biggest one is this tax software and any of those businesses is not programmed to work in the gray area. It’s going to be black and white because it’s a computer program and that’s what they have to stick with.

So example I like to give is home office. Everybody, some people claim it, some people don’t. We take a home office, especially if you’re working from home.

But one of the things is internet. I mean, you’re using internet to run your business. But in the tax software, the internet is a home office deduction.

So you’re going to get pennies on the dollar for that $800-ish you spend on internet versus treating that as a business deduction fully. And that’s just another $790 of deduction you could not pay tax on. It’s just one small example of how CPAs can help business owners maximize deductions.

And a lot of e-commerce brands, especially when they’re starting off, I mean, typically they’re running it out of their garage, right? So what about that? I mean, obviously they definitely get that home office deduction, but if they have tons and tons of inventory just stacked up in their garage, can they take it a step further and also deduct for that? No. Inventory is never a deduction. Inventory is only expensed when you sell it.

And that’s probably the biggest, one of the biggest conversations we run into with most e-com sellers in the initial conversation is a lot of them are they’re like, oh, I didn’t make any money last year, and they just, when you do their books and reconcile everything, you find out where they’re just expensing all their inventory purchases. And but inventory is never a deduction.

It’s always sits on your balance sheet as an asset until you sell it and move it over to cost of goods sold. So that’s why we like to get started with reconciling the data first so we can see the real story. And then from there one of the tax strategies is looking at formation.

Do they have an LLC set up? If they do are they an S-corp? Does their profits justify making the S-corp election? If they are an S-corp what’s the reasonable salary need to be based off the net profit? So going through all those tax strategies and working in the gray area and seeing what we can maximize is what a lot of the low-hanging fruit, to quote you, is what we initially looked at with clients that we can immediately add value to. Yeah, I learned that you can’t write off inventory unless you sell it the hard way. Yeah, I had a little like side hustle e-commerce business.

I went in and went on with a client and let’s just say it didn’t go very well. And we ended up with just a ton of inventory just sitting there. And I was thinking, oh man, I’m going to get a nice tax break this year.

Boy, was I wrong. Yeah. So what are some more tax rules that e-commerce businesses should be aware of? Where are you finding savings with your e-com clients? Savings.

I mean, it it really depends on what they’re doing. It depends on the level of business they’re doing. I mean, if they’re in a warehouse looking to buy things and they’re larger and established e-com looking at equipment, looking at larger purchases, what can we deduct in the year? For smaller businesses it’s really about if you’re looking to buy something, maybe you’re looking to buy a computer or you’re looking to office expenses or something, then certainly buy those before year end.

But mainly it’s about inventory. And that’s really what drives the initial conversation with most smaller e-com businesses starting out or kind of in phase one, phase two, what we consider in our four phase e-com approach. We have like a white paper on our website, but  that first phase or two inventory is the biggest thing.

And then sales tax if they’re on Amazon, I mean, they’re collecting it obviously, but you sell it on your website. Kansas requires a hundred percent sales tax. If you sell into their state, are you collecting it? Are you remitting it? Because you sold a couple items to Kansas? Probably not.

Will they catch you? I don’t know, maybe, but you should be collecting it. You should be remitting it. So that’s one thing to be aware of is sales tax that we have a conversation about, especially people selling on their own outside of major platforms like Amazon or Etsy.

Yeah. Sales tax is something that can get pretty complicated, right? Because every state has a different role and sometimes it’s different based on where you’re headquartered to. Right.

How do you recommend that e-commerce business owners keep track of that? You know, typically there is software out there to kind of keep track of it. What have you recommended in the past? Yeah. I mean, TaxJar is what we recommend for the U.S. Avalara is a great company and they have cool commercials right now, but they’re expensive and they live in international sales tax.

That’s their expertise. So if you’re overseas and you’re selling in different jurisdictions, especially in Europe and Japan and Canada, wherever, those taxes, you want to go with Avalara. If you’re just U.S. only in the 50 states, TaxJar is a lower cost program that we recommend.

You know, if you’re strictly on Amazon, you don’t even have to worry about it. I mean, they’re collecting, remitting it for you these days. But if you’re outside of that, you’re on different platforms you have your own Shopify account.

You know, that’s what we want to plug in a TaxJar, see where your jurisdiction lies, see if you need to be collecting and filing anywhere. And then syncing Shopify with QuickBooks online. And we use A2X for Amazon sync.

So we try to be as efficient as possible and not spend as much time on accounting as we need to. Yeah, yeah, for sure. So you mentioned inventory and cashflow are some of the major things with Econ Brands.

How do you approach that? Like, how do you recommend to your clients? And I’m sure it’s a case-by-case basis, but how do you kind of have that balance between cashflow and, like holding on to too much inventory so you can make sure that you aren’t tying up all this money that you’re going to pay taxes on in inventory every year? Good question. I mean really boils down to what you can afford in your own cashflow budget and not to overextend yourself too much. What can you recover from? You know, we’ve had stories where people came to us and they’re sitting on all this inventory and they got a huge tax bill and they can’t pay it.

And then you get down in this debt spiral where you can’t pay taxes and you can’t pay this year’s taxes. And you’re trying to buy more inventory. That’s just not a good place to be.

So cashflow, obviously staying within your realm and staying with what you can afford. You know, obviously leverage, starting a business is necessary in most cases. You need a line of credit.

You know, you’re buying it on credit cards, but we try to avoid that because the interest is high. You want to pay those off every month. But we’ve had clients getting lines of credit and managing the business and getting ready for Q4 and selling it.

You know, when you’re starting out, it’s a little bit tough because you don’t know what’s going to sell. You don’t know what’s what’s going to clear out. But by year two-ish after that, you should know kind of a cycle of what your inventory is going to be.

And maybe you’re adding new products and taking on that risk, but you want to make sure and cover your monthly bills first, take care of yourself, and then beyond that how much you want to leverage up the business. But it’s a case-by-case basis, depends on the client, depends on what they’re selling, depends on the brand they have or if they’re arbitraging products. So those are all different conversations we have with clients every day.

Yeah. And I think one thing that maybe a lot of e-com owners may not really think about, especially when they’re first starting out and before they get a lot of money tied up in inventory is get a line of credit as soon as you can, get it when you don’t need it so that you can use it when your business is experiencing cash flow issues. Yeah, that’s absolutely true.

I mean, I have a line of credit. I’ve never touched it, but I have one. It doesn’t cost me anything in my bank to have it.

But it is true. They only give you money when you don’t need it and they don’t give you money when you need it. If you’re going for traditional financing you can obviously get some hard money lending, but it’s going to be expensive and unless you can afford the high payback quickly and you can turn it around.

But again, sometimes those are a bit of a gamble. You want to be careful. Right.

Yeah. Super risky. For e-commerce businesses specifically, what accounting method do you recommend? I mean, for most business owners, I mean, we get this question often.

I guess there’s a lot in the industry that promotes this. I don’t really know where it’s coming from, but I mean, for the most part, we don’t get wrapped up in accounting methods. For us, from a tax filing perspective, it’s looking at each individual business, advising them on best practice.

I would say from a monthly accounting perspective, we do focus on accrual based because that smooths out the numbers when you’re looking period over period and being able to do controller advisory, fractional CFO type work, accrual is necessary to get a more accurate picture and be able to forecast things. But unless from a tax perspective, unless you’re buying a bunch of equipment at your end, or you have a lot of bills at your end that could claim this tax year generally tax-wise cash basis is fine to go with, but you don’t have to pick one and stick with it. You can be a management reports monthly and do accrual like what we do.

And when we file taxes, it could be cash basis. And so we analyze that when we’re estimating taxes, depending on how the client’s filing to, to make sure we’re on track for the right estimated tax year end. Yeah, cool.

Are there any changes to tax rules and strategies that hit in 2022 that the listeners should be aware of? Generally, Congress hasn’t made that many changes. I think one of the biggest ones, everybody likes to eat out and deduct it. So meals went back to 50% all meals.

It was 100% for a couple of years with the COVID changes temporarily, but it’s back to 50 that Congress didn’t change it or extend it. And then there’s some energy credits individually that people may apply for or qualify for. They’re pretty small in nature.

I mean, it’s not going to move the needle 500, 1500 here and there, depending on stuff you bought, but they’re once lifetime. So it’s not like you can buy something last year and this year and just keep getting it. And then for larger econ businesses, I mean, the cap on 179 deduction to fully depreciate it out is up a little bit, 1.16 million to expense, qualified expenses out.

But other than that, we haven’t really seen, or Congress hasn’t really promoted too much change this year to be aware of that wasn’t the same last year. Cool. Well, good to know.

So from an accounting perspective, what would you say your secrets to scale are? Going back to cashflow, I think keeping a tight cashflow forecast I mentioned at the very beginning, like I didn’t pay myself for two years. So I understand what it means to be tight on cashflow helping safer estimated taxes. So you don’t get in a debt spiral extending yourself that you can only financially recover from, I think is the biggest key to remember.

You know, once cashflow sustainable, I mean no one, remember, no one cares about your livelihood and your own retirement more than you. So we try to remind clients, like once cash flows there, usually after year two or three, where it gets a little more sustainable, we try to convince our clients to put something away every year into retirement into savings for asset protection and a rainy day. And my approach, my personal approach is I ask do you one day want to find yourself not caring if you’ve scaled this business so much that selling is inconsequential? And it’s just a bonus at the end of the day, when you sell it, and you move on, like, do you, do you want to be in that spot? I do.

So you know, I manage my own money that way. And that’s what we try to promote here to our clients. And so saving something today, it doesn’t have to be a lot, just start somewhere.

And you know, put that money away and dividend paying stocks, let it make money for you as you grow your business and build your wealth that way. That’s what we’re trying to promote to scale here. So you’re not at the end of the day, the historically, it’s always been let’s leverage up and grow this business.

And it’ll be worth something. But in general, unless you have your own brand, and you know, you’re selling it to a merger and acquisition deal, you might get lucky there. But in general, you never get what you put into it, the blood, sweat and tears of it of growing a business.

So my philosophy is I’m growing a business, but at the same time saving and building my own personal wealth. So at the end of the end of the rope, I’m not hoping and praying that this business sells for the money that I expected to. Yeah, I think that’s a really good point.

Really sound advice. One last question for you, Chase. You talked about like rainy day fund savings for ecommerce businesses specifically how much runaway should they have in cash reserves at all times? We try to we got to start somewhere, but we try to start with one month, then we move it to three, then we move to six.

Eventually, we like to see a year’s worth of short term cash and savings. Now personally use like ally.com bank for short term. But that’s what we try to move towards.

I mean, you got to start somewhere, you can’t just have it obviously, you’re investing back in inventory, and maybe you’re growing different lines of business or building the brand. So there’s always cash needs. But start with one month and get one month of bills and cash flow and savings, and your estimated taxes.

Don’t forget about that one. And then three months and six and 12. But mostly once you get to 12, you should be in a good spot.

And then you can usually, usually you can borrow some money because your business is established by then and get a line of credit to leverage the rest of it. Yeah, I think that’s good advice. So Chase, appreciate your time, taking the time today to do this interview with me today.

What is a great way for everyone listening to get in contact with you? Yeah, I appreciate it. Yeah, you can reach us on our website, insognacpa.com. And we’d love to talk to you. I mean, I’m here talking to you during tax season, because I got 20 people behind me doing accounting and taxes.

So I’m not like that one owner shop with everything in charge. And so I mostly focus and have conversations with clients every day on how we can help them. And so we’re happy to have a conversation at any time.

Awesome, man. Well, we’ll be sure to link up your website in the show notes. And thank you again.

Thanks, Tanner. Thank you for listening to another episode of eCommerce Secrets to Skill. Be sure to subscribe so that you never miss another episode.

This podcast is sponsored by Ranksy Digital Marketing. If you own an eCommerce business, and you’re ready to take it to the next level, visit our website at Ranksy.com. That’s R-A-N-K-S-E-Y.com.