Taxes. The one word that most entrepreneurs dread even thinking about, let alone going through the process of filing. If unprepared, a business owner can feel like taxes are a dark cloud looming over them. However, there are many legal ways that entrepreneurs have found how to reduce the amount of taxes they need to pay, but also the time spent organizing and preparing them.
In honor of the tax deadline that just passed, Bill and I share our best tax saving tips. From figuring out the right time to outsource your books, to what you really shouldn’t be buying, we arm you with some killer tax savings tips for your next years’ tax day that will help you stay ahead ahead of the game right off the bat.
Here’s What You’ll Learn
- The 1st thing you should outsource
- How to determine the right business structure for you
- 7 unorthodox tax deductions that are 100% legal
The Full Conversation
Andrew: Today, right around April 15th, a little bit after, and I thought it would be very fitting in the post-tax frustration period for a lot of entrepreneurs to talk about taxes. Today’s episode is titled “How to pay less in taxes without going to prison.” Joining me to talk about the ins and outs of how to make this happen is someone who I’m pretty sure hasn’t been in prison, at least for a few years, Mr. Bill D’Alessandro.
Bill: That’s right, never more than a night, right? Doesn’t count unless you stay overnight.
Andrew: And congratulations, we were just talking, you just moved to Charlotte, North Carolina, right?
Bill: Yes, I just bought a house down here and moved back to the south where I was raised, so I love it down here.
Andrew: We were talking, you just moved in, no furniture. You’ve got the . . . you’ve got a pretty sweet studio going on right now. What’s the day two studio move-in looking like?
Bill: Yeah, so I’ve got essentially no furniture here, so if you’ve ever seen that picture of Steve Jobs in the empty apartment with the wood floors, like sitting on the floor in the corner, that’s basically me right now. So I’m sitting with my MacBook and my podcasting mic basically on a folding chair in the corner of my house that has no furniture in it.
Andrew: If anyone has any premium furniture, high-scale stuff they want to donate, BillDA on Twitter.
Bill: That’s right.
Andrew: So a few things before we get into today’s episode. Of course, maybe it’s cheesy to have this disclaimer, but we are not tax lawyers or accountants. These are things that we’re going to be talking about that worked for us in our business, our take, that may or may not work for you and also a quick apology, again, this is probably going to be most applicable to our US listeners. For everyone internationally, I apologize. Can’t help you much there. The IRS’s watchful eyes are over you, this will probably be most applicable to you.
Bill: I do know this is different, in some ways, in Canada. So I don’t know about everywhere else, I’m sure it’s different, but for sure it’s a little different, some things are different in Canada. So this is very U.S. only.
Andrew: Yeah, we’ll have some broad levels concepts, hopefully that will apply just to accounting and taxes overall, but when we get into the nitty-gritty, yeah, our apologies to non-US listeners.
Bill: All right. Let’s dive into to today’s discussion on taxes.
Andrew: So Bill, we’ve got a bunch of different things to talk about , but I think one of the biggest things that’s helped me with taxes is I’ve started it off trying to do all my taxes myself, all my accounting myself, and it was, it probably is good to do at least once, right? So people understand how things work from an accounting and a tax standpoint. But as you’re growing your business, you’re getting bigger, you’ve got more important things to do, you’re scaling up, oh man, if you’re not outsourcing this stuff, you really need to be. In terms of having an accountant, having a bookkeeper, and often a lot of times it makes sense to have those separate. Do you do your own books and your own accounting or do you have someone else do it?
Outsource As Much As Possible
Bill: No. I haven’t done that for probably four years now. It’s, as you said, it’s so worth it. And it’s not that expensive, either. I started off with a local accountant who had a bookkeeper on staff. I paid them in total $200 a month to do my bookkeeping and probably $1,000 at the end of the year to file my taxes. I’ve now stepped up to a firm in Atlanta who’s a little bit more high-end because my situation is a little more complicated now, and I think they’re $500 bucks a month and they’re like ultra-premium, so it’s not that expensive to outsource this stuff.
Andrew: Yeah. I think my bookkeeping is $325-ish a month and there’s a lot of stuff that they do. Our accountants, probably the same things, they just do year end stuff for us and they file as an S-Corp, which is not crazy, but it looks pretty gnarly to me when I go in there and look at everything. They’re probably $1500, maybe $2000 tops a year for everything. So not too bad, definitely worth the time. From a bookkeeper’s standpoint, $325 per month, Bill, I don’t know about you, but if you ever did do them on your own, and I did them for a while, I was terrible.
Bill: Oh, yeah.
Andrew: Terrible. I’d be like, six months behind, and thankfully, I’ve got a cash flow positive business so it wouldn’t be a huge issue, but it’s never good to be looking at your financials six months in the rear view mirror.
Bill: Well, yeah. You don’t know what’s going on. That was my problem, too, when I was doing them by myself. That’s why I’m really on top of my outsourced accounts now. They have my books for the prior months closed within 5 days of the month end, which is nice because then I can see immediately what happened. When I was doing it myself, I had no hope of that, as you mentioned. I was months behind and also it took me so long because I just didn’t . . . I wasn’t good at it. And I’m sure it takes them a quarter of the time it used to take me. The other nice thing is by doing it outsourced, these guys are actually accountants and bookkeepers, they’re not just doing your books. So they can make recommendations about this is how I’ve seen it done with my other clients, this is the current guidance from the IRS, this is typically how I’ve seen it done in the past, so it’s just so much less brain damage to outsource it to the pros.
Andrew: If you’re going to be doing payroll or sales tax, along the same lines, don’t try to do this yourself. I mean, you can, you can file all the paperwork directly with your state, if you’re paying sales tax and all this kind of stuff, but again, take a cue from the same kind of principles. It saves a ton of headache, and for payroll taxes, use a payroll tax service. They’ll charge a fee, but I think I pay maybe, I don’t know, I think it’s $50 or $75 per month, and it handles the payroll for our company for three salaried employees and it’s just worth it. I don’t have to pay the quarterly filings or deal with people. It just happens. Same things on the sales tax front. There’s a great service called Tax Jar, I think that helps with that out. So we’ll link up, we’ve got a good thread in the private forum that talks about a bunch of different payroll services. We’ll link up to that, but use one. Don’t do it yourself.
Bill: Yeah, this is one of those things where I think entrepreneurs who are trying to save money go, “Oh, this isn’t so complicated, I’m no dummy. I can figure out how to do mine. I file a couple forms for payroll and all that stuff.” But it’s so much worse than you think it is. Dealing with the government, all of the taxes and then it’s just getting all the accounting right and getting it on your tax forms. It’s so cheap to outsource, this should be one of the first things you outsource.
Andrew: Yeah, Bill, I don’t know about you, but I am, when I get paper mail, sometimes it will sit for months . . .
Bill: Months, oh yeah.
Andrew: Months before I open it. I’m terrible. My email inbox is, I mean, people communicate with me by email, it gets done, it gets dealt with. But almost no tax agencies do. I’ve been in cases where my worker’s comp has gotten cancelled and usually I’m pretty on top of things and organized. When it comes to government stuff, not so much. Another reason why for as bad as I am with paper mail, go digital with some of these services.
Bill: Right. And on that stuff, some of that worker’s comp and stuff, it’s 15 day notice before you’re in trouble.
Bill: And I’ll go two weeks without checking my mail all the time.
Review Everything Closely
Andrew: Yeah, agreed. So outsource everything. On the same token, a very related and important point. Make sure you’re reviewing everything closely. So, you want to automate things, you want to have other people handling these things, the majority of them, but you can’t 100% trust that they’re going to be right. For my monthly reports that I get from my bookkeeper, they do a pretty good job, but almost without fail every month, I go in, I review them, there’s different things that need to be categorized in different areas, or things that are a little bit off that I need to tweak, then. Same thing with my tax return. I’ve got a good accountant, but at least a couple times, I’ve gone through and gone, “Hey, interest didn’t come and this guy was added twice, in the personal and the business side.” Or, “Hey, you forgot to deduct this expense.” Make sure you’re looking over this stuff, you can’t completely abdicate responsibility.
Bill: Yeah. The other reason that’s important, too, and you’ll feel this out after you outsource is that different accountants have different levels of comfort with different tax strategies.
Bill: So you might want to be a little bit more aggressive, obviously within the law, but a little bit you might have to answer some tougher questions if you did get audited. You might say, “It’s worth the risk to me. I want to be more aggressive.” But you might have selected an accountant who is much more conservative and would not have even suggested some of the more aggressive tax management strategies to you. You do need to be up on what your options are so you can feel out, so you can even know if your accountant is an aggressive accountant or a conservative accountant and guide him to the level of aggression that you’re comfortable with.
Andrew: Yeah, and along those same lines, some accountants just specialize in certain industries, certain income brackets, whatever it is. And you also need to, it’s really important to read up on stuff and to look into, you don’t have to go crazy and dig deep into tax law, but for high level stuff, you need to understand it. I’ve talked a lot of people and in terms of finding an accountant that will really sit down and really dig deeply into your circumstance and say, “What’s your life like? What’s your business like? What are you doing?” And offer you all these different options to save on taxes?” I don’t think most accountants do that. I think a lot of times they’re just busy, they’re just trying to get what you bring to them done to them. So, as we’ll talk about later on, there’s been a number of things where I’ve been like, “Hey is there any reason I can’t do this to save money on my taxes?” And my accountant was like, “Oh yeah, I guess you can.” And in one case there was a stretch that he hadn’t heard about. Unless you’ve got someone who just really knows you really amazingly well, you’ve got to take initiative to also look and see where you can be saving as well.
Bill: That’s what makes a good outsourced accountant. And also, as you were talking it occurred to me that maybe we should take a bit of a step back for people who aren’t totally familiar. That’s what an accountant does. An accountant is going to do more of the strategy, what deductions we want to take on taxes, what accounts do we want to put things in, how can I get your reports that make the most sense to manage your business? What goes in gross margin and what goes in SG&A? That sort of thing. Whereas a bookkeeper is the person that’s going to review the transactions every single month and put them in the right categories.
Andrew: Great distinction. Often times they work for the same firm and will be different people, and occasionally if it’s really small time it will be the same person, but those are kind of what the two job functions do.
Bill: Yeah, great point.
Make Sure Your Business Is Set Up and Structured Right
Andrew: So in terms of business structure, your business structure, you can have huge implications in terms of how much tax you’re paying and how that’s set up. So these are, of course, relative to what we’ve done in our experience, and it’s going to vary based on your situation, but my two favorites are kind of independent e-commerce entrepreneurs are just a straight up LLC, a single member LLC that you have, usually Montana, it’s like $125 to file for it. I think it’s like a $15 annual maintenance fee and it gives you some level, not impenetrable, but some level of liability protection. And if you’re making a little bit more, and it depends on the state, it depends on your category, but it’s in the 60-70ish range on S-Corp, setting yourself up as an S-corp. Without getting too detailed, you can, as an S-Corp, pay yourself as an owner a salary and then take out the rest of the profits from your business at a lower tax rate on capital, kind of dividends rate, which is a lot of times 15 or 20% versus 25% plus, which is what you’ll see a lot of times. So, Bill, what do you think, are those your two favorite?
Bill: Those are the two easiest. I mean, the LLC in the United States is really the simplest form of corporate personhood. It’s the simplest form of corporate entity, it’s what’s called a pass-through entity. So anything, any profit that the business makes, the business doesn’t pay any tax at all. So if the business clears 100 grand, that 100 grand drops straight onto your personal tax return as top line income and then you can take all of your personal tax deductions like mortgage interest or, you know, the standard deduction or whatever it is, you pay tax on the remaining amount. So the net of the LLC drops into the gross on your personal tax. So that’s really the simplest form, and the S-Corp is a little different in that it also does not pay taxes, it’s still a flow-through, but you don’t pay, as Andrew mentioned, if you’re making more than $50,000, $60,000 the reason the S-Corp starts to make sense is because for an S-Corp, if you’re a Director, you have to make what my accountants call a reasonable salary, and there’s a lot of debate as to what that is. But as far as, I think, I’ve talked to Andrew about this before and I think you’re . . . $50,000 or $60,000 or $70,000 is reasonable. Is that what you’ve heard, Andrew?
Andrew: Well I think it depends on where you live and what you’re doing. The IRS has been really ambiguous about reasonable means, so somebody who is . . . Montana, the wages in Montana are pretty low, so somebody working in Montana is probably going to be less than somebody working in LA.
Bill: And the reason this matters is because you pay yourself, let’s just say you pay yourself $60 grand, on that $60 grand you have to pay self-employment tax, which is Social Security, Medicare, Medicaid, all that fun stuff. 15.3%. So you’ll pay 15.3% on the first $60,000, but everything above that $60,000 you’ll take as a dividend, as a business owner, where you do not have to pay that 15% on.
Andrew: Yeah, and I don’t know that it’s always 15.3, I think my accountant was saying, but the actual savings will end up being something like 7.3% or something like that.
Bill: You don’t have to pay the second half.
Bill: You don’t have to pay the lawyer half on any bit over 60k. Or over the reasonable salary.
Andrew: Yeah, but it makes a big difference, you know? If you’re looking at 7% of $40,000, it’s meaningful. And the reason why the 60, 70-ishK makes the kind of the 50 and 70ishK, depending on your circumstances makes sense as the breakeven for when you should start considering an S-Corp is because it is more complicated. An LLC, super easily on your tax filings. You’re pretty much . . . I mean I think it’s like one or two pages, maybe. On S-Corp, it gets a little gnarlier.
Bill: The S-Corp, the business has to file, essentially, a separate tax return. It’s like more forms, but I believe if you’re an LLC it’s very easy. You don’t have to change your entity to an S-Corp, you make what’s called an S-Corp election when you file your taxes, which basically says, “Hey, I’m an LLC, always been an LLC, but this year I want you to tax me as though I was an S-Corp. And a good accountant, it’s just like a form you check. They should be able to do that. So you don’t necessarily have to change your corporate structure from LLC, but once you get over that 60K net, you know spot, you have to tell your accountant, “I want to make an S-Corp election.”
Andrew: Yeah, that’ exactly what we did and it was just painless. We didn’t have to do anything without corporate structure, it was super simple. So in terms of ownership structures, we’ll link up to a couple discussions in the forum. One that kind of talks about where people are chiming in with how they’re incorporated, how they’re set up and the pros and cons of that, as well as a training video that we’ve got in there on all the different legal structures. Everything from sole proprietorship to C-Club. Quick question, Bill, do you think the C-Corp is usually, a lot of times owned or created if companies need to raise money, if you have a lot of different owners and you want to do crazy things like issue stock options. Very common in the start-up world. Does it every make sense for small business owners if you see double taxation on that?
Bill: I don’t think so. You just hit it. The only reason to do a C-Corp, which is your, in quotes, corporation, you’re classic publicly traded large corporation structure in the United States, as opposed to S-Corp, which we were talking about before, but a C-Corp, really the only reason to do it is, as you mentioned, if you want to raise money from venture capitalists or private equity investors, which the only reason you would want that is because C-Corps are governed by a very defined set of laws, and there’s a lot of case precedent about how stock is issued and shareholder rights go and everything in a C-Corp. So your investors will want you to be a C-Corp. So that’s one reason to do it. The other reason do it is if you need to have over 500 shareholders, which I think nobody listening to this podcast will have over 500 shareholders.
Andrew: Jeff Bazos is blushing right now.
Bill: But the reason you don’t want to do it, the reason you essentially don’t do it until you’re forced to do it is because you get taxed twice. The C-Corp is like an actual person, so the C-Corp pays a tax on your profits. I think it’s at the corporate tax rate, which is what is it, Andrew? I have no idea.
Andrew: Corporate tax rate? I don’t know. U.S. is pretty high. I don’t know off the top of my head.
Bill: I think it’s 30 plus. I think its 30-40%. I think. Obviously you hear about all these corporations sheltering their profits and whatnot, but in a vanilla way, the corporation pays tax first and then you’ll pay a 15% dividend on any money you take out of it. So you kind of get that money taxed twice. It usually does not make sense to pay that extra tax unless you have to. I mean, I know extremely large corporations. We sold, when I was in investment banking, we sold a business with $500 million in revenue that was an LLC.
Andrew: Wow, that’s crazy.
Bill: So just because you get big doesn’t necessarily mean you need to become a C-corp.
Rapid Fire Deductions to Hit
Andrew: I was hammering through some deductions to consider and we’re going to skip all of these, the real common ones you feel terrible giving, you have the deduction for the interest you pay on a mortgage, but here’s some ones that aren’t quit, maybe, as well known, but you should be thinking about if you’re an entrepreneur, or self-independent store owner. The first one, home office deduction, where if you have a dedicated room in your house where you work from, you can deduct the percentage of that room, let’s say your home is 2,000 square feet, your office is 200 square feet, you can deduct 10% of your mortgage payment, of your homeowner’s association dues, of your utilities. It adds up to be a decent chunk.
Bill: Yeah. All your internet, all your power bills to your house, your air conditioning, everything, 10% can be deducted to reduce your taxable income.
Andrew: Yeah. Whatever percentage of that office is as a percentage of your house.
Bill: I do want to point out one thing that I did not know until recently. The IRS requires that you take the home office deduction. They require it to pass the exclusive use test, which means that that area of your home can only be used for business and cannot ever be used for personal. Whether or not they audit you and figure this out, if you ever get busted is one thing. But if your home office, if there’s a crib in there and your kid also hangs out in there, or it’s like a playroom, or if you do your own personal, I don’t know, you design furniture on the side and you do that from there, or if you do any hobbies from that office, that means that you fail the exclusive use test and you cannot deduct any of it.
Andrew: This is a great excuse to make 100% business/man-woman cave of your own for complete privacy.
Bill: That’s right.
Andrew: The IRS requires it.
Bill: That’s right, it has to be exclusive use.
Andrew: The second one is a health savings account. I think so many of us independent entrepreneurs and store owners, at least in the U.S., the healthcare situation is such a cluster, and there’s not a great way around it, but one of the ways that you can minimize the pain is something called a health savings account where you can pretty much put up to, I think it’s, for couples it’s $5,500. Or maybe even more than that, into the $5,000, $6,000 ballpark-ish. About half of that if you’re single, where you pretty much just put money into an account and you can deduct it off your taxes, and pretty much use it to pay for any healthcare expenses apart from premiums. So it’s a pretty good deal.
Bill: Yeah. So it makes everything, essentially, pre-tax. All your healthcare stuff. I think, can you even use it on Advil and stuff?
Andrew: Yeah, I think so. Again, no official tax advice here. Yeah, I think you can.
Bill: I think you can. You can use it on co-pays and doctors, basically anything. I think you might even be able to use it on a gym membership.
Andrew: Ooh. I don’t know about that one. I don’t know.
Bill: I’m not sure. But a lot of stuff. There’s a lot of stuff. Google it. There’s a lot on Google about that.
Andrew: So the third one, I think this is one you alluded to earlier, Bill, just the IRA of course. Individual Retirement or ROTH IRA. For any reason you’re not eligible for an IRA, for whatever reason, a ROTH IRA especially, you can do what’s called a backdoor IRA contribution. We’ll link up, in the show notes, we’ll link up to an article that gives the high level way this works, but basically you make a non-deductible contribution to a regular IRA. Normal IRA’s you can deduct from your taxes. You make a non-deductible contribution to a regular IRA and then you roll it into a ROTH IRA. You can get around a lot of times a lot of the restrictions on ROTH IRAs.
Bill: So that allows you to make a ROTH contribution when you’re over the income limit? Is that the point of this?
Andrew: Yep. Exactly. Over the income limit, or I think there’s a couple other restrictions on when you can’t contribute to a ROTH, but yep, exactly.
Bill: Interesting. The income cap is what, $110,000 a year or something? Above which you can’t contribute anymore?
Andrew: Yeah, right around. I think it depends on if you’re a couple of single, but yeah, it’s around there. I think it might be $150 or something.
Bill: Interesting. So you make a non-deductible IRA contribution and then roll it into your ROTH IRA?
Andrew: Exactly. And it depends, this is something you definitely want to talk with an accountant about, because if you have a lot, this is best if you don’t have a lot of ROTH IRA, or regular IRA assets already. If you have a ton of regular IRA assets, there’s a huge taxable event that occurs, because you have to pretty much pay tax on the total amount of all of your IRA contributions when you make the roll over. So it really is best if you don’t . . .
Bill: Oh, yeah. Wow.
Andrew: . . . yeah. So this really is for people who, if you don’t have a whole lot of IRA assets and you aren’t eligible for a ROTH IRA contribution. It may be nuanced, but it’s one that doesn’t get talked about very much, which is kind of cool. Another one is using your miles carefully and using them in a way that minimizes your tax burden. So, for example, if you are . . . we’re going out to . . . Bill, are you going to IRCE?
Bill: I am, yes.
Andrew: Awesome, wonderful. We’re both going out to IRCE. With that, we can do one of two things. We can pay for miles, we can pay for a trip ticket to Chicago with miles, or we can use funds within our business account. And I’m going to pay for it, even if I have miles, if we’re out of my business account checking because it’s a legitimate business expense, and because then I can actually use my miles to pay for a personal account, and you have a tax savings there because you can write off the cost of going to Chicago on your business, against your taxes, which will save you maybe a third of the price of a ticket. There’s no way you could write off the price of a personal trip somewhere. So save the miles for your personal trips.
Bill: Yep. And also that kind of counts, too, if your credit card gives you cash back. Because the cash back, I’ve kind of looked into it, it seems a little gray, but the cash back . . . I have a Capital One Spark card that gives me 2% cash back just in cash, they send me checks. As I understand it, it’s considered a rebate or a sales discount, and thus is not taxable.
Andrew: Yeah, I’ve looked into that too, and Bill I’m on the other side. I actual claim the tax on the cash back I get, I claim that on my taxes.
Andrew: I do.
Bill: Because the credit card company does not send a 1099.
Andrew: Yeah, I know. I do know that. Yeah, that’s a gray area. That’s kind of a risk area. Like how comfortable are you?
Andrew: With different areas.
Bill: Maybe I shouldn’t have admitted to it on public radio.
Andrew: This is wonderful, that’s what makes this good, right?
Don’t Buy Something Just to Deduct It
Andrew: Buy as much as you legitimately can through the business. And the key emphasis on here, on the word legitimately. So if you’ve got equipment, computers, furniture for your office, business meetings, make sure, even if it’s little, make sure you’re expensing that stuff. I’ve got a friend who . . . I think I had a friend who was getting into business, and he was going to expense his car. I was like, dude, he was working from home and he wasn’t going to use the car for a key element of the business. It would have been a huge, I don’t know if it’s a red flag to the IRA, but there’s no way it would have withstood an audit. So write off what you can, be aggressive as long as it’s legitimate, but don’t get carried away.
Bill: Here’s an example of what that I do that. I have a good friend in Boulder, also an eCommerceFuel private forum member, and we help each other out all the time with our business. Two CEO level guys, and we talk strategy all the time. But we’re also buds. We go out for beers and dinner frequently. Just, socially. But inevitably we end up talking about business the whole time. And so, what we ended up doing is we pay each other $100 a year of consulting fees and when we go out, we talk about business, I can expense it.
Andrew: It sounds sketchy, but you’re legitimately talking about business stuff.
Bill: Yeah. And we’ve had great ideas that come out of that and I apply it to my business and it’s made my business better, so it’s legit. But that’s something that you might not think to expense, but you can. If you’re really talking about business the whole time, and there are limits. I think LLC only allows you write off 50% of meals and entertainment too, so it’s not a huge thing, but it does. Every little bit is something.
Andrew: Yeah, it does add up. We’ll link up to a discussion in the forum. Bill, I think you started this one. A great one on how to minimize your tax burden legally. Tons of members weighed in on different strategies they had. Some of these, including a number that we didn’t mention as well. Along the same lines like we’re talking about deduct things that you actually . . . are related to your business and you actually need, but don’t purchase something solely because you can get a tax deduction from it. I think this is one of the dumbest things I think people sometimes do, it’s like, “Oh, hey, I’m not sure if I actually need a 2016 new truck for my job, but hey I can deduct it, I’ll buy it.”
Bill: Right, right.
Andrew: You could have kept 70%, yeah you get a 30% tax deduction, but you’re wasting 70% of the money, so be smart with your deductions.
Bill: Right. I do fall into that sometimes. It’s like, “Oh, it’s a business expense. It’s not real money, it doesn’t count until it hits the bottom line.” But it’s easy to forget that it would have hit the bottom line if you didn’t buy that $3,000 computer that you didn’t really need.
Thoughts on Giving the Government Tax-Free Loans
Andrew: Yeah, exactly. Bill, what do you think is the school of thought out there that’s don’t give government a tax free loan? Do you ever get a rebate? If you ever overpay on your taxes, you’re doing a terrible job tax planning, you should be putting that money to use somewhere else, you could be earning interest on that money. I’ll save my thoughts on it for after your take, but what do you think about that?
Bill: I have been on both sides of the fence. For a while, when I was working, when I was not working for myself, I would jack up my exceptions or something, allowances, such that I would take home more, and I would usually have to pay a couple grand at tax time. So it makes tax time very anti-climactic because everybody else gets a few grand back and you have to write a check, which just makes you hate the government even more every year. But you have the money the whole time, so I was like, “Well I invested that money in the meantime and I made a reasonable rate of return on it, plus, I just had the money.” But since becoming a business owner, i have completely flipped after the first year that I had to write a massive check to the IRS and did not have the money set aside for it. That sucked a lot. In March, I realized I had to write a five figure check that I had not accounted for right out the door and that hurt a lot. So now, I pay and I don’t know, I’d be interested to see if they’d put you on this too, but they’ve got me on this where I’ve got to pay quarterly based on last year’s profit. So based on whatever we did last year, they calculate the tax that’s due and you have to pay one quarter of that every quarter. If your business is up, you pay even more on your taxes. If your business is down, you get a refund. So I’ve been paying now quarterly so I don’t have this shock to my system unexpectedly in April, which I sleep better at night.
Andrew: Same thing, I’m on quarterly payment. I think a lot of times, I think your first year you have to pay once, but once you get above a certain threshold you only . . . I’m not sure how it all works, but you hit certain guidelines and then you have to start paying quarterly. And I’m kind of like you, Bill, for me, I would much rather, when I look at my bank account, I would much rather see a balance that is free and clear of any tax liability then have some extra money to invest at one tenth of one percent in my Wells Fargo checking account. Whoop-dee-do I’m getting $5 in interest. Now granted, there’s a little bit better options out there, but yeah, so whenever I have him come in I pay quarterly. If I have a lump sum that comes in, when I sold trolling motors.net, that generated a huge tax event, and I could have delayed that and broken that off, but I just cut the check for that, for the tax liability, a month after the sale happened. Even though I probably could have deferred it for 12 months, but I didn’t want to see it, I wanted it to be clear. I wanted to have a clean slate.
Bill: You just straight mailed them a check? Just put it in an envelope and sent it to them?
Bill: Wow. That would be hard for me to do.
Andrew: Well what’s the option? It’s either that or go to jail, right?
Bill: Or wait and do it later, yeah.
Andrew: Yeah. For me, though, I would much rather see the balance clean and free as opposed to having the extra third or whatever it is in there. But know that in 12 months I’ve got to pay that. I hate that.
Bill: Aren’t you a patriot? Paying your taxes voluntarily.
Andrew: Well what’s the alternative? I don’t understand what the alternative is.
Bill: You wait until the last possible minute, I guess.
Andrew: Oh, yeah. That’s not . . . I don’t know, that’s just not how . . . it drives me crazy to do that. So, audited. Have you ever been audited before, Bill?
Bill: Thank god, no. I almost don’t even want to talk about it.
Andrew: Yeah. It hasn’t happened to me from the feds yet, although I imagine it will come at some point and I’ve had a couple state audits. They’ve been pretty straightforward, no big deal, but it kinds of brings up an interesting question in terms of what kind of receipts you keep. For me, I’m pretty conservative. I don’t put a ton of travel or a ton of meals and entertainment on stuff, but I know some people are very careful about saving every single itemized receipt. A lot of things for, especially to do with my suppliers or things, I have some back up copy in email, I will just save the year end credit card statement. I’ll print off that, I’ll print off my bank statement, all my checks that I wrote and save digital copies of those. But I’m probably not as anal as I should be about paper receipts. How are you? Are you pretty good about that?
Bill: I have been in the past, horrendous about that. As I mentioned, I’m on these new accounts now and they are leaning on me more to keep receipts. And there apps you can use, which I’m trying to use, where you take pictures of them and it files it. Or you can even just snap pictures and put it in Evernote and then send the Evernote to your accountant.
On Getting Audited
Andrew: Yeah. But I mean, kind of my thinking . . . and the other thing, too, the accountant said to do, if you don’t save receipts, especially for meals and entertainment. If you go out with somebody and you talk business, make sure there’s a note in your calendar so you can go back if you do get audited and the person goes, “This charge from X restaurant was on this date,” and you can go back in your calendar two or three years and say, “Oh, on that date I was with Zack and we talked about whatever.” So just put something in your calendar that says who you’re with and what you spoke about, which you will never remember in two years, nor will you be able to prove, but if you have a note, you can tell the auditor that it was legit. So I’m really trying a lot more to put stuff in my calendar like that, when I know I’m going to have a business expense so I can always go back in the calendar and I’m saving more receipts now. I’m saving larger dollar receipts. If I buy something for $1,000 and it’s a business expense, I’ll save that. I’ll snap a picture of that receipt. If I’m traveling for work and I spend $8 at McDonald’s, I don’t save that receipt because if the auditor is that much a dick that I can’t explain to him that I was clearly on a business trip to Chicago as he sees from the flights and everything, and I ate McDonald’s and he’s going to disallow that, paying an extra dollar or two of tax on an $8 McDonald’s doesn’t really kill me.
Bill: It’s interesting in terms of auditors, I had a really interesting discussion with my mastermind group this last week and one or two of them, I can’t remember, had been audited and both of them said that a lot of the auditors, at least from the IRS side, IRS, of course, is not going to be the most loved and favorable institution in America, but they said that the auditors were fairly nice, straightforward people. Real people, they weren’t jerks, they were just interested in getting stuff figured out. They also mentioned speed was really important. A lot of times auditors are judged on how quickly they can get something wrapped up, and so the faster you can work with them and the more responsive you are, probably the more willing they’re going to be to work with you on things. They also mentioned that in some cases, having an attorney who really specializes in auditing and the IRS can help a lot because they really know what to push back on and they do it for a living. So if it’s a small little deal, maybe you can do it yourself, but if it’s something that’s fairly large and has some big implications, it’s probably worth hiring a tax attorney, an audit attorney who can specialize and help you out in that.
Andrew: Definitely. And this is one thing to ask your accountants, too, our outsourced accountant, say, “If I do get audited, what do you do to support me?” And most big accounting firms should have a process. They’re like, “If our clients get audited, we’ll be with you every step of the way, we’ll hold your hand. We’ll come, we’ll sit with you and the auditor.” All sorts of things. So just ask, “What happens if I get audited with you guys as my accountant?”
Bill: Yeah. And along those same lines in terms of audits, some things in the tax code are very clear, right? Like you need to . . . this is what you owe, this is this. Other things, like you were mentioning, credit card cash back. It’s a gray area. And it’s an area where depending on how . . . It’s not black and white. In those cases, obviously, it comes out to some part of the risk tolerance where it’s not black and white, but you also want to know what happens if you do get audited and the IRS does decide that, “Hey, that’s income.” That’s a conversation to have with an accountant and say, “Okay, if we do get audited, what’s the liability there? What are they looking at? Are they just going to disallow it and then slap us with a small fine? Or is that something where it’s going to be a 10x penalty on the original amount?” So knowing that as well, not for all areas, but for the gray areas, I think, is important to think about.
Andrew: Bill, I think that’s it. Any parting thoughts here on taxes?
Bill: Vote for politicians who don’t want to raise your taxes. That’s the end of my political rant. I did a very good job. I did not bring politics into this at all.
Andrew: You did. Apart from the ten minute rant we had to edit out of this, you did a fantastic job of keeping politics out.
Andrew: Well, thanks so much for listening, guys. Good luck with your taxes and your tax planning. I hope it was helpful and looking forward to chatting with you next time, Bill.
Bill: Thanks, man.
Andrew: That’s going to do it for this well, but if you’re interested in launching your own e-commerce store, download my free 55-page e-book on niche selection and getting started. And if you’re a bit more experienced, look into the eCommerceFuel private forum. It’s a vetted community for store owners with at least 4,000 in monthly sales or industry professionals with at least a year or more experience in the e-commerce space. You can learn more about the e-book and the forum at ecommercefuel.com. Thanks so much for listening, and I’m looking forward to seeing you again next Friday.
What Was Mentioned
- Order Circle | Element Brands | RebelCEO.com | Nurture My Body | Ski Balm | Mexitan – Bill D’Alessandro
- BogleHeads: Backdoor Roth IRA
- eCommerceFuel Forum: Just Hired My First Employee, Not Sure What To Do About Payroll
- eCommerceFuel Forum: What is Your Business Structure: Sole, Prop Corp, LLC, Etc.
- eCommerceFuel Forum: Legal Structures Video
- eCommerceFuel Forum: Let’s Share Secrets: Minimizing Taxes aka Legally Shielding Income From The Man.
Photo: Flickr/Pablo Fernandez