Episode 29: 3 Essential Tax Tips For Entrepreneurs From a CPA to Ensure Success
They say that two things are inevitable, death and taxes. Well, here at Encore Empire, we believe there's a third, and that's empowerment. When you hang with the right crowd that builds each other up, you give and receive the empowerment you need to build a profitable business and live your best life. Deirdre is about to empower you to understand that being the CFO of your business isn't scary if you have the right guidance.
[01:04] Carmen Reed-Gilkison: I don't know about you, but I can't wait to hear the real deal from our very own CPA and finance mentor, Deirdre. They say that two things are inevitable, death and taxes. Well, here at Encore Empire, we believe there's a third, and that's empowerment. When you hang with the right crowd that builds each other up, you give and receive the empowerment you need to build a profitable business and live your best life. Deirdre is about to empower you to understand that being the CFO of your business isn't scary if you have the right guidance. Take it away, Deirdre.
[01:43] Deirdre Harter: Thanks, Carmen. So, have you ever seen the commercial for Farmers Insurance? I'm going to give you the little jingle here. Maybe you'll remember it: We know a thing or two because we've seen a thing or two. We are Farmers, bump, bump, bump, bump, bump, bump. Now that is a catchy little tune, and it's always stuck with me because that's the one thing we know as we get older and as we become seasoned in life and in our entrepreneurship. We know a thing or two because we've seen a thing or two. Right? And I'm sure you've experienced this in much of your life.
Now, if you don't know me yet, I'm a CPA - a certified public accountant - and for over two decades, I worked in a few different firms and with hundreds of business clients. And I have seen a thing or two. And it's that time of year when we are thinking about wrapping up this year so we can enjoy the holidays and be set for a profitable new year. This typically involves reviewing this past year and beginning to set some goals for next year. Some of you may even be given a final push to hit those goals before the year ends. Am I right? You may or may not be, including tax and financial planning, into what you're thinking about right now. So in this episode, Carmen and I want to share with you some practical financial planning tips, along with the importance of being CEO minded and what that means. And part of what that means is the fact that you are also the CFO, and that is the Chief Financial Officer of your business. What we will be sharing with you today will apply if you own a business that has earned revenue this past year.
So the first point we want to talk about, and a question I want you to consider, is, do you have a strategy and someone looking out for you? And by that, I mean, do you have a CPA or a tax preparer, or a financial advisor? Well, whether you do or do not, you should be empowering yourself by looking out for yourself, regardless of whether you do your own bookkeeping or you have a bookkeeper that takes care of it for you, whether you prepare your own taxes or you pay a CPA or tax service to do them for you. As a business owner, it is in your best interest to have a solid understanding of how your taxes are calculated, what you can and cannot deduct, and to have a tax and financial strategy laid out that will ensure you pay what you owe and not a dollar more.
Now, I know that some of you might be going, oh my goodness, we're going to get into all of this tax and financial talk, but stick with me because I'm going to make this very simple and very easy to understand. And these are some really, really important things that you may or may not know. And if you don't know them, it could cost you a lot of money.
Now, when you're paying hundreds or maybe thousands of dollars a year for bookkeeping services and a professional tax repair, it seems like this should be one less thing you need to think about or spend your time learning about, right? Like, you've hired an expert, so you should be able to just mark that off, check it off your list, and not worry about it. But here's why it's important. As the CEO of your business as well as the CFO, and of your personal finances, which a lot of times they aren't necessarily intertwined, but one affects the other. It's important to have this foundational understanding in this area. So I want to talk about transactional versus advisory services. Now, when you hire a professional in the bookkeeping and accounting area, some firms are transactional, and some are more advisory. So what does that mean? Well, transactional means if you hire a bookkeeper to enter all your receipts and reconcile your bank accounts, that's transactional, right? They're just recording what's going on, and they're putting it into the software. When you have your taxes prepared, it's transactional. They're taking the information you give them, or your bookkeeper gives them, and they're putting it into a tax form, and they're spitting out a tax return on the other end. Now, there may or may not be any advisory services with it. It really depends on who you're working with and how it's all set up. And so many times, I've seen that this transactional nature often costs the taxpayer or the business owner some money that could have been avoided.
Now, another issue I saw happen time and again was business owners not realizing all the deductions that they could take. So they never provided that information, and the tax preparer didn't bother to ask. Now, in the firm that I worked for, we were transactional, but we also layered advisory on top of it. We weren't for everyone. I used to always tell people if the fees that we're charging are more than you've paid in the past, and typically these are people coming from like H&R block and places like that, I said that we may not be the firm for you because we built in those advisory services. We were actually looking out for our clients, and we were helping them with the planning piece of this. Now, we had a checklist that we gave all of our clients every year. And this went out in a packet to every single client that we had. But I can't tell you how many of them just totally skipped it. They didn't even bother looking at the checklist. They were so used to just putting the normal stuff in the packet that they never bothered. And that checklist could change from time to time depending on what the current tax law was. And we especially saw the checklist getting skipped as we got closer to the deadline for our clients to turn in their information.
Now, the way it works from the inside of a CPA firm is whoever is preparing your taxes; they do review your financial reports. They do look at what you're submitting. However, they may not recognize something out of the ordinary, or they may not see that maybe you inadvertently didn't include something. Now, part of quality control was we were always supposed to look at last year's tax return and compare it to this year's tax return. So that would help us find out like maybe you submitted mileage on your vehicle last year, but then you missed it, you forgot about it this year. So we would have some analytics to look at. And so then we go, oh, let me go and check with the client. Let me see if they actually had mileage; what happened to the vehicle? The problem was that not every tax preparer was diligent, especially as we got closer to those deadlines. Because let me tell you, tax season is a pressure cooker environment, and oversights happened all the time. So I want to give you a couple of the two of the most overlooked deductions or mishandled deductions just so that you're aware of this and you can talk with your tax repair or CPA about this.
The first one is the personal loan that you've used for business expenses. Now, what that means is if you have ever used your own personal money to invest in your business and depending on where you are in your business, what stage you're in, and how long you've been in business, at some point, you may have invested personal funds. Right? I know Carmen and I, we have both invested in the different businesses that we've had, and a lot of times, it was a substantial investment. Those personal loans depending on how they are put into your accounting software, can and should be a loan from you to the business. Not only are you going to get paid back and not pay taxes on it because it's not taxable, but you can also charge interest on it. And that interest is deductible. So by having that set up properly, not only are you getting your money, your initial money back, but you're also getting interest. The company, the business, is paying you interest for the use of your money. So this gives you more money on the personal side, but it also allows the company to deduct it as an expense, which, if you don't know about this, it may or may not get caught.
Now, if you're a sole proprietor, meaning you're not incorporated, or even if you are incorporated as what they call a single-member LLC, that just means that you're incorporated, but it's only you, and you're the only person who owns the business. So you can just simply put that expense, you can just make a journal entry and put that expense on the books. And you don't need any loan documents, nothing formal. However, if you're like an LLC and you have an S Corporation election, then that needs to get booked a different way. And it's basically run through an equity account, and that's called loan from shareholder or loan from member. Now, I'm not going to go too far into this, so hang with me. I don't want you guys to go; oh my gosh, we're getting too much into the whole accounting speak. But I just want to make you aware of this. And if this sounds like something that it's not being done or not being done properly, then this is something that you can make a note of, and then you can go get some advice around.
[11:55] Carmen Reed-Gilkison: Are you ready to get the guidance you need to optimize your online business? We help ambitious female entrepreneurs cut through the online noise of too many options, too many tactics, and too many shoulds. Through our encore business incubator. Group program and our Empire Builder two-on-one laser coaching program, we teach you the right steps to take and in what order so there is no more guesswork. And we teach you how to measure and track your progress so you can clearly see what's working and what's not. You are cordially invited to hop on a complimentary consultation call to discover if working with us is the next right step for you. Head over to encorempire.com/consult to schedule your call. Now.
[12:47] Deirdre Harter: Now, the second area is the home office deduction. Now, this really adds up. And this encompasses all the maintenance, repairs, the mortgage, the interest that you're paying on your home. Even if you're renting, you can include this and this. A lot of times people won't take this deduction. There's been this long-standing idea or myth that people will say, well, I don't want to take it because it will flag an audit. I can tell you that the IRS auditing is so much more sophisticated than that, that just simply having a home office deduction is not going to necessarily flag an audit. The other part of this is that if you only have like a small space, you might think, well, it's not going to end up being that much, and it's too much effort to pull all that information together. Well, there's a standard deduction that you could take, and it's $1,200, and you can deduct that on your expenses. So there's a couple of different ways to do it. Again, this podcast is not going to be all about specific ways to prepare your taxes, but I wanted you to understand that that's available, and you should be taking advantage of it if you have a home office.
Now, there's another thing that's fairly recent that I wanted to make you aware of, and this is if you have an S corporation, then a few years ago, we were just simply able to take our home office deduction. We were… anything you paid for like if you were personally paying for your cell phone rather than the business, you could just deduct that off of your personal tax return. As a shareholder, it was really easy to do. Well, everything changed when the law changed with the Tax Cuts and Job Act, and there's a new way that you can still take it, but you have to jump through a few hoops. And that hoop is called setting up an accountable plan. And basically, this is a formal reimbursement arrangement that allows the S-Corp to pay its employees or shareholders for their business expenses. So it's a structured and legal way to deduct that. You have to do it a certain way in order for it to count, and it covers things like that home office use. It also includes things like mileage. You can get in trouble if you're reimbursing yourself for mileage that you take if you don't have this kind of plan set up. So it's another thing to make a note of. If you've not heard of it and you don't know about it, then that's something you definitely want to look into. And as long as you're following the accountable plan’s rules, you're setting those up in advance, then all the reimbursements to you are counted as valid business deductions, and the reimbursements are tax-free to you with an accountable plan. The tax law requires that these reimbursements be reported on your shareholder's W-2 as taxable income. So this is an area that could really add up for you if it's not set up properly. So that is the end of the specific tax portion of this podcast. But I really wanted you guys to understand there's some things that are worth your attention and worth at least getting an overview of.
[16:10] Carmen Reed-Gilkison: Alright, and what I want to talk about now is the mindset around finances and what we see happen time and time again with our clients and other entrepreneurs that we interact with out in the world. A lot of people come in, and they come into our program, or when we're talking to them, and they find out that Deirdre is a CPA, they automatically throw out qualifications or reasons why they don't understand their finances, right? They feel ashamed that they don't understand their finances, and we do not want anyone to feel that way. They feel shame about the fact that they don't know how to set up or optimize their finances. And what happens after that is they find themselves in trouble because if they don't know how to set up and optimize and they're going forward running their business, they're making mistakes that they just aren't aware of. It's that whole thing of you don't know what you don't know, and it applies not only to finances but to business strategy and everything else. And, of course, we cannot know everything. So I don't want you to feel overwhelmed by any of this but what I want you to know is you can find yourself being in trouble by making mistakes that you didn't know, even if you are a savings-oriented person. And so this happened to my sister where she is the most by-the-book rule follower and saver that I know. And yet she found herself a few years ago owing tens of thousands of dollars above and beyond what she had set aside because she didn't know what she didn't know. And she's an entrepreneur, she has her own business, she is very successful, and she knew that OK, we're doing great this year, I need to set this money aside. And so she set a bunch of money aside, and then she was dismayed, and of course, it was a little bit scary for her to learn that not only were the tens of thousands that she set aside not enough, but she owed tens of thousands more because she had made a mistake. And this just speaks back to what Deirdre was talking about because you can take your finances to the tax preparer, but they aren't combing through everything for you. And so she just didn't know what she didn't know. Now, of course, she's not going to make that mistake again. But it's so important to learn these things so that you don't make these mistakes. We don't want you to have these tens of thousands of dollars mistakes, right? And learn from those. Let's take the time to learn. And I think that's the biggest thing is you're not going to automatically know. You're not supposed to know all of it, right? So we're giving you permission to give yourself grace. You're not supposed to know it all unless you have intentionally set out to learn about taxes and finances. How would you know? It's not going to happen by osmosis, right?
And sometimes we think just because we're adults, we're supposed to know all kinds of things. Like, suddenly, it's like, wait, am I the adult now? I don't have my parents to ask about something, or I don't have a boss or whatever. Now I'm the adult. I'm supposed to know this. And then it makes you feel less than or like you're missing the boat and everyone else understands. But the reality is, and we see this day in, and day out, most people don't understand. And it's because you're not going to just suddenly gather this knowledge from thin air. You have to take the time to intentionally learn about it. And yes, learning takes time, but it can save you so much. And that's why we talk about the importance of investing in your business. And investing in your business, too, as Deirdre mentioned as well, becomes a tax deduction, right? So if you need to learn some of this stuff, we really recommend that you take the time to set aside so that suddenly, instead of feeling unempowered because you don't know anything and you're ashamed about it, and you're hiding it, and you don't know it's nagging you and causing stress in the background constantly, all year long. You can learn the steps to take that keep you safe and secure. And then you can feel empowered. You don't have to become a CPA or a bookkeeper. You just have to know enough to know the tasks that you need to take care of each year to make sure that you're safe. That's all it is. And if you look at that, it kind of shifts the mindset for you, hopefully. We're not asking you to get a degree in finance or learn everything that a tax preparer knows or any of that stuff, but let's learn the things that we need to know to help avoid these tens of thousands of dollars of costly errors in the future.
[20:41] Deirdre Harter: Yeah, that's such a good point, Carmen. And it is the stress, right? It's the stress of knowing something is undone, that you've got something that you need to take care of, and it hasn't been taken care of, and you really don't know exactly what to do, and especially after what we've talked about. And this is one of the reasons why Carmen and I are so passionate about working with our clients the way that we do. And we have included this financial savviness in our program because I saw too many times where someone did all the right things Just like Carmen's sister, right? They put their money away, they were paying estimated taxes, and they were having a professional do their taxes, only to end up with a problem. And it's because not every CPA knows everything. Not every firm that you go to works the same way. And there were far too many people that were or too many things that were being overlooked or not talked about or not caught in time until after the fact. And yes, it got fixed in the end, but it cost. And so that's one of the reasons why we've included this and working with our clients. We help you know what you need to know and nothing more so that you can feel confident when you are getting the help that you need and you're having those experts help you, and so that you're feeling confident about what they're doing and you feel like you can be part of the conversation with them. Because that was another thing I noticed is that clients would come in, and not only was there the shame factor but then there was this lack of confidence. Like they didn't know how to be a part of the conversation because they didn't feel like they were informed enough to be a part of that. They didn't know what questions to ask. So these are the things that we like to empower you to know so that you can run your business and feel confident about it.
[22:45] Carmen Reed-Gilkison: Yeah, I just want to add that being able to join the conversation with the experts you're hiring in any aspect of your business is critical. And we are firm believers in learning how to do the things that you have going in your business. Meaning if you have a membership site, if you have a website, if you have this, that and the other thing. You don't have to continually keep these things up, but you should know enough so that when you hire an expert to help you with Kajabi or MemberVault or WordPress or whatever it is, that you can have a conversation and know that someone's not fleecing you, right? That's the other thing. Like, if you don't know how to have the conversation, you don't know how to check and see if someone is telling you the right thing or not. And again, it's not about knowing everything. It's about knowing just enough. So that was a great point, Deirdre.
[23:37] Deirdre Harter: Yes, that was too, Carmen. so a lot of times, you may be thinking, okay, this all sounds great, but Christmas is coming, and I will worry about all this stuff in February. February tends to be the time that people are then starting to think about their taxes, right? Because April 15 is coming. March 15 is coming for corporations. Those are your deadlines. And so people are like, waiting. And then all of a sudden, February 1 comes around, and that's the conversation right on social and with everybody like, oh, we're coming up on tax time. But here is why. And why we're doing this episode is you shouldn't wait until February to begin thinking about your taxes. And I'm going to give you some reasons why.
The first reason is what we talked about a few minutes ago. It's that accountability plan. This plan needs to be documented and adopted formally in meeting minutes and kept as part of your records. And reimbursements have to be distributed in a certain amount in a certain period of time. So it has to be done this year. If this is something you don't have set up, it's got to be done this year. Otherwise, you miss out. You won't be able to take it this year. Timing is critical, so there's a couple of different time frames. One is that it must be done in 60 days or less after the expense is paid or incurred to qualify for this particular rule. There is another part of this that gives you 120 days, and I'm not going to go into all that, but just know that the timing is critical. And if this is something that you have not set up with and you're looking at your numbers and knowing your numbers is our next point, and you need to have some deductions, and you want to take this, then this is the time that you need to be thinking about it and planning this out.
So the next part is knowing your numbers. Now, maybe you, and hopefully you're looking at financial reports on a monthly basis at a minimum. But if not, let's say that you're… just recently, I've been working with a couple of our clients who did not have their bookkeeping set up, or they had it set up, but they weren't really using it properly. And so we've been diving in, and I've been helping them get that up to speed and get their financial reports. And the reason is, even though we're not at the end of the year yet, now is when you need to know. And we're recording this end of November, beginning of December, but you need to know if you have an overall profit or loss for the year. This way, you can ensure that you've paid enough in your estimated taxes. Okay, that's what Carmen and, like Carmen's sister, she was paying her estimated taxes, but that's not always enough. There are other taxes that might need to be paid. There are other situations that might happen. We're going to talk about the basis of your accounting here in just a second. But you must ensure that you're getting those estimated taxes paid if you wait to pay everything at the end of the year or when tax time comes - and that's typically what people do, like when they have a salary from another company. Like if you're an employee, you don't really have to worry about too much. It's all been taken care of for you. But as the CEO and CFO of your company, you have to be looking at these things. You have to be looking at, do I need to start taking a salary? Is my salary high enough? Am I taking enough of the taxes associated with that? There's so many questions and things you need to be looking at.
Now, the fourth quarter of estimated taxes is due on January 15. It's always due 15 days after the following month when the quarter ends. So you still have time right now, but you have to know your numbers. And if you don't have your bookkeeping up to date or you're going to wait until February when the deadline is looming, you're going to miss out on an opportunity to avoid some penalties and interest if you haven't paid enough. So it's very critical that you know that. The other reason you want to know that is right now you have an opportunity to defer some tax liability or to defer revenue recognition. And you can do that for an entire year. And then, you can use this to reinvest in your business. So what is that, and how do I do that, you ask. Basically, what this means is that I said in the very beginning we want to pay the taxes that are due and not a dollar more. We want to pay them on time, but not ahead of time. This is just kind of basic Financial Management 101.
There are a couple of ways you can use this in your favor. You can accelerate your spending. Now, that might sound counterintuitive. You accelerate spending to save money, right? But here's how it works. There are two ways that your taxes are filed. You're on a particular basis, and by that, I mean you're either cash basis or an accrual basis. Now, a cash basis just means all the money that comes in is your revenue. All the money that goes out is your expenses. And this is over the calendar year when you're on this, and a lot of businesses are on this cash basis; it's simple, it's easy. And if you're on a cash basis, then you can, for example, pay some expenses that maybe you're due, maybe you're paying some monthly expenses, or you've got something that you normally pay for in January or February of next year. You can actually pay those ahead of time, and you can deduct it in this year. So this can save, this can reduce the amount of taxes that you're going to owe for 2022 simply by paying things you're going to pay for anyway, and you're just paying them a little bit earlier. Okay? So that's one method.
Now, if you're on an accrual basis, what that means, and there's some additional rules around this, accrual is a more complicated form of accounting. But basically, what it means is you're only paying taxes on revenue that you earned this year and expenses that you paid and utilized. So I'm going to give you an example. Carmen and I recently took advantage of some Black Friday deals on software. So some of the software we were using and some software we had our eye on, we're like. We would really like to have that. Well, they came up on some Black Friday deals, so we were able to save like crazy amounts, right? Like 50% off. So we went ahead and we paid for the full year, so we're paying for the whole year. So we've got twelve months of this. However, we use the accrual method of accounting for our taxes, and so we can only, we can't deduct that whole amount. So if we spend $1,000, we can't deduct $1,000 this year; all we can deduct is one month's worth. So it's really one twelfth of that. Now, this might seem like, well, that's not very good, but here's the advantage to this type of accounting basis. We're also able to postpone revenue that we're receiving now if we fit for a future service. So, for example, our coaching program that we have, we have two it's the Encore Business, Incubator, and then we have the Empire Builder program. Our coaching packages are for twelve months. So we've actually had some clients come in recently, and they paid for the full year, but we don't have to count all that revenue this year. We only have to account for the months that they're in, and so the rest gets deferred to next year. So whichever basis you're on, this is something that is basically a tax planning tool. And there's several rules around this. And again, if you need help with this or not sure if you're on the right basis, your tax prepare can help. And this is also something we help our clients with, is to ensure that you're using the most advantageous tax basis for preparing your taxes so that you are again paying what you owe, but not a dollar more, and paying on time and not ahead of time.
[32:18] Carmen Reed-Gilkison: Such good information. Thank you so much, Deirdre. Now, I have a question for our listeners. How would it feel to have this type of guidance inside your business every day? Our clients enjoy the benefits of having a CPA to run things by and to guide them in their financial planning and decision-making. It's as simple as they drop a question in, get a response. They're not stuck. All that overwhelm of not knowing what to do goes away. And they're realizing that, hey, this isn't that hard. It is fantastic. If you want to learn more about our programs and how they can help you grow your business, we invite you to hop on a no-pressure call, click the button below or head over to encoreempire.com/consult and schedule yours today.