EP200217 RichOnPlanning - PLANNING MATTERS - SMALL BUSINESS TAXES W Author Dan Pilla

If you fail to plan, plan to fail.

How do you want your future to look? We want you to plan for success. Welcome to Planning Matters Radio.

Welcome into the program. This is Rich Hahn, Planning Matters Radio. I am Peter Rochon, founder CEO at Rochon Planning. We are a local independent fiduciary financial investment and retirement planning firm, and we appreciate you tuning into the podcast. If you like the podcast, if you would subscribe on your favorite platform, that would be fantastic. If you've got questions or topics or subjects that you would like to hear addressed on the podcast or that you would like to address individually in person, feel free to be in touch. You can visit us online at richhahnplanning.com, that's richhahnplanning.com, or give us a call, 919-300-5886, 919-300-5886. Now, as any small business owner knows, running the business is not just about running the business.

You've got to deal with a lot of paperwork, and one of the biggest burdens on small business owners is taxes. As we usually do, we've got a very special guest joining us on this edition of the program, and we are now privileged to be joined by our guest. He is Dan Pilla, author of Small Business Tax Guide, the complete guide to organizing and operating your small business. Dan, welcome in. Hey, thanks for having me, Peter.

We appreciate the time. Now, Dan, as everybody knows, I mean, to get into business, you've got to be a tax expert as well, don't you? Well, it seems that way. I mean, the fact of the matter is there's hundreds of different obligations that are heaped on small businesses, Peter, and unfortunately, most small business owners find out about them the hard way, you know, after the IRS challenges what they've done or, in most cases, what they didn't do that they should have done. And so that's what gets these folks in trouble, and that's what this book is pointed at, is keeping small businesses in compliance so they don't get clobbered by rules they never knew existed. But to be frank, I mean, doing the taxes is one of the most enjoyable parts of being in business.

That's why we got into it in the first place, right? Yeah, that's exactly why we all get into business, Peter, is to be tax accountants. And the fact of the matter is that doing the tax return is, you know, just one part of tax compliance generally. And, you know, small businesses listening to us right now, small business owners may say, well, you know, I've got an accountant, Dan, I don't have to worry about that.

Well, that's great. You have an accountant to do the tax return, that's great. But I like to use the analogy of a dentist. You know, you go to the dentist once a year to get your checkup and your, you know, your teeth cleaning and to fill a cavity if necessary, and okay, that's fine. But the dentist doesn't brush your teeth for you every night. The dentist doesn't floss for you every day. You know, the dentist doesn't do the day-to-day things that you need to do to keep your teeth and gums healthy, and that's exactly the relationship that most people have with their accountants. They see them once a year, maybe twice a year for, you know, certainly tax return preparation and perhaps the preparation of other reports or documents. But the day-to-day stuff is on the business owner, and he has to know what he or she is doing here to keep the proper records so the accountant's job is not only easier, but the tax return is accurate, that the accountant doesn't have anything to do with the underlying records that are dependent on the tax return's accuracy. Yeah, and like the dentist and the cavity, it can be pretty painful if the problem is already there. Yeah, exactly right.

Yeah, no question about it. What are some of those mistakes that you have seen small business owners make that have cost them time, money, and productivity? Well, I think one of the single biggest mistakes, and this is something that no accountant can help you with, is keeping a proper mileage log. You know, one of the biggest expenses that a small business owner is going to have is her vehicle. If she's driving around, say, for example, you've got a realtor, a self-employed real estate salesperson, right? So she's driving around in her car every single day.

She's showing customers and prospective customers houses, you know, she might drive a couple hundred miles, two, three, four hundred miles in a weekend. You know, that's a huge deduction for a real estate professional, and that deduction is available only if you have the proper logs of your mileage. And there's particular ways that have to do it, particular legs of travel that are deductible and certain other legs that are not deductible, and this is not an area where a CPA is going to babysit you on an ongoing basis. Now, you know, so you have to know how to keep these logs and these records, and I've got a chapter in the book, Dan Coel's Small Business Tax Guide, I've got a chapter in the book that shows you exactly how to keep these records, including charts, to demonstrate for you graphically exactly what legs of your trip are deductible and what legs of your trips are not deductible so you get the most possible bang for your buck on the mileage expense for your vehicle. Now, technology to some extent making that a little bit easier, correct?

Yeah, yeah. In fact, I talk about the technology in the book as well, but again, the technology can't tell you whether this leg is deductible or that leg is deductible. You have to know that in order to take advantage of the technology. Now, purchasing of tools and equipment, things to help the business run productively, that's another one of business owners' largest pieces of overhead and expense. There are some great advantages to making those purchases, specifically maybe this year and next year over the next couple of years, correct? Yeah, the real advantage is the so-called Section 179 deduction. Normally, when you buy equipment that has a useful life of longer than one year, in other words, it's a copy machine for your office, for example, that's got a useful life of more than one year unless you bought a piece of junk that dies in six months, but of course, machinery is pretty solid these days, right?

It's got a useful life of more than one year, and that equipment typically generally has to be depreciated over its useful life. Let's just say you keep the math simple, $7500 on an upscale copy machine and it's got a useful life of three years, well, your deduction typically is $2500 a year, but the election, so in other words, you can't claim it all at once. Generally, it has to be spread out, but there's an election that's available under Code Section 179 that allows you to expense the entire amount of the expenditure, that is to say, deduct it all in one year. It's an affirmative election you have to make on the tax return that says, I'm going to write all this off instead of spreading it out, and that is a huge advantage for folks that A, have to purchase equipment, they need equipment for their businesses, and B, they've had higher than usual or higher than expected income in a particular year. Let's say in 2020 here, now you've closed a couple of big deals and you're going to have substantially more income this year than you've had in years past, rather than pounding yourself with an additional income tax liability because you've got this additional income, maybe this then would be the year to purchase equipment that you needed, use the 179 election to write it all off and therefore get a deduction that will offset that income and keep your tax liability down. C-Corp, S-Corp, LLC, does your book help a small business owner make sense of those and maybe when to utilize one over the other or make a transition?

Yeah, yeah, it does, and in fact, in my opinion, one of the most important parts of the book is understanding the different entities that are out there. When you talk to small business owners, and of course, I talk to small business owners every day because my job, Peter, is litigating against the IRS. The information that's in the Small Business Tax Guide is the culmination of over 40 years of litigating with the IRS in small business cases where people have gotten sideways with the IRS. This is the formula for staying out of trouble is what we're talking about here. In specific answer to your question, I'll talk to small business owners all the time about reasons why they elected, for example, to be an LLC or to be an S-Corporation, and the answer is almost universally, I don't know. That's what so-and-so suggested.

Because it was the easiest thing to do. Easy, for sure, and maybe it was just a suggestion from this person or that person or a CPA or whoever. In too many cases, Peter, the suggestion was from their brother-in-law, the barber, who suggested that the LLC was the best way to go because of something somebody told him in a while in the barber chair. Well, that's not solid tax advice.

You can't go by that. So in the Small Business Tax Guide, I have a chapter in there that lays out, that explains all eight. First, I identify all eight of the different entities that a person can use to do business from, S-Corporation, sole proprietorship, LLC, and the list goes on.

There's eight of them. I give you the explanation of what that entity really looks like. In other words, what is an S-Corporation?

What does that even mean? All right, so I explain that, and then I show you the pros and cons of operating under each one of the particular entities. So what is the advantage of a sole proprietorship? What is the disadvantage of a sole proprietorship?

And then, Peter, and this is where virtually everybody goes sideways. And frankly, this is worth the price of the ticket right here, just this information in my opinion, is I show you exactly what you need to do to stay in compliance with respect to that particular entity. So in other words, an S-Corporation has a return filing obligation different from a partnership. A partnership has filing obligations different from an LLC. All right, and so I explain all of these compliance requirements so you can see at a glance exactly what you need to do to stay in compliance with your tax reporting obligations. And I'm telling you, you can't imagine the percentage of small businesses that are out of whack with compliance because they do not understand exactly what they have to do, in other words, what hoops they have to jump through to stay legal. You could be paying more than your fair share, but if you're not keeping the proper records and keeping in compliance, you could still run afoul.

Yeah, yeah, no question about it, absolutely. And I would argue that most small businesses do pay more taxes than they're legally required to pay for just that reason. Payroll and benefits, another big area where small business owners have questions.

Any guidance or tips or secrets there? Yeah, in fact, there's two chapters in the book that deal with payroll issues. The one chapter shows you exactly how to deal with employees. What are the requirements that the IRS places on an employer when they hire an employee? What most employers think in terms of, well, I hire an employee, I've got to pay them a wage, and then I've got to do deductions.

Okay, fine, what does that look like? But now I show you what the forms are that need to be filed, I show you. There's five things, Peter, that an employer needs to do when they first hire an employee, and most employers, they can't name five of them.

And I would argue to you that most CPAs can't name five of them. And so that's another reason why they get, why small businesses get sideways. Now, along those lines, one of the single biggest mistakes that small business owners make is in the classification of workers as independent contractors. In other words, they want to have some help in their business. Business owners need help in their business, but they don't want to go to the step of hiring an employee because of the cost and the hassle that goes along with it. And so what they do is they treat their worker as an independent contractor. That is to say they just pay the full check, and they say, okay, this person is an independent contractor, not an employee, and so therefore I don't have to do holding and all the rest of that. And that is a huge problem for small businesses because the rules that govern whether a worker is an employer or an independent contractor are very strict and they're very specific.

And I promise you, there's not one person in 3000 that knows what these rules are. And that includes, unfortunately, most CPAs that do return preparation. If they're not in the practice area, that is to say dealing, and I should say the litigation area, dealing with Irish challenges and audits and appeals and tax court, then they just probably are not going to understand the nuances of these rules.

And in the Small Business Tax Guide, I break this down for you step by step by step so anybody, even somebody without a tax background, especially someone without a tax background, can understand what these rules are and how to apply them so you don't get messed up. If we're doing that one wrong as a small business owner and as an employee, what are the possible repercussions? Well, the repercussions are significant because, for example, if you pay, if you pay a worker as an independent contractor, and the IRS does an employment tax audit, which by the way, employment tax audits are always on the top, on the list of the top six or seven what so-called enforcement initiatives that the IRS pursues every single year. So in other words, employment tax compliance is a very high priority item for the IRS and it has been for years.

And it's going to continue to be going forward. And so if you go through an employment tax audit and the IRS says, oh, you've been paying these workers as independent contractors, but they're really employees, what they do, Peter, is they reclassify the worker. The IRS will come along and reclassify the worker and say, okay, this worker should have been treated as an employee, but he wasn't. And so therefore now we're going to go back and assess against you, the employer, we're going to assess all the employment taxes and all the penalties that should have been paid, but weren't. And in addition to that, not just the employment taxes and the penalties, but in addition to that, they assess against the employer, the worker's tax liability that should have been withheld from the worker's paycheck and wasn't. And so this is a huge risk.

If you pay, if you pay, let's say $10,000 in payments and the IRS reclassifies those payments as wages, you might have a $4,500 tax liability when everything is said and done. And so now let's project that over, you know, instead of $10,000, let's say it's $50,000 a year. And now let's say it's three or four or five workers that are converted. This is a huge, huge problem.

And it happens, I'm telling you, it happens all the time. And so employer, self-employed people just simply need to know what these rules are so they don't get sideways. Taxes, equipment, employees, taxes, penalties, is there any room for profit or even making headway towards saving for retirement for a small business owner? Well, well, yeah, there is. I mean, there's, there's, I mean, of course, it just simply depends on the business.

There's no question about that. But, you know, small businesses are the backbone of America. They have been for centuries and they will continue to be, I would argue, for decades going forward. Small businesses are the backbone. The vast majority of new workers that are new employees that are hired in the workforce are hired by businesses with fewer than 20 employees. So it's not, you know, it's not Amazon and GM and Microsoft that makes up the bulk of the new hires in our country. I mean, those companies have hundreds of thousands of employees combined. And, you know, we think a big business is being responsible for all those employees. But you've got to remember, there is millions of small businesses out there and the vast majority of these businesses have fewer than 20 employees. So when those businesses are out there hiring one or two additional employees, that's where all the growth comes from. And their experiences, businesses are experiencing these growths, this growth because, you know, a lot of them are making money.

Now, obviously not all of them do. The fact is that the attrition rate for new businesses is pretty high. I talk about this in the book as well, that, you know, I forget the statistics off the top of my head, but it seems like to me that about half of all new businesses fail in the first three years of operation. And in the first 10 years, another 30% of those fail. So I mean, it's... Could it be as a result of IRS interference?

Well, certainly there's no question that that's a factor, Peter, no doubt about it. You know, businesses get sideways with the IRS. And I've had small business people tell me, I've heard this a thousand times over 40 years, you know, I'm never going into business for myself again. And so that's the result of bad experiences with the IRS, not necessarily bad experiences in the business itself. And so what I want to do, my goal here is to bring all my experience and all my knowledge of how the IRS attacks a small business and lay that battle plan in front of every business owner in America so they can see exactly the direction the IRS is coming from, all right? Well, I'm giving you the enemy's battle plan here. So now you can see exactly the direction the enemy is coming from and precisely what kind of forces the enemy has that they're bringing to bear against you. I mean, what kind of an advantage is that in a military situation?

Obviously, it's a huge advantage. And this is the advantage I give you in the battle to stay in compliance with your tax obligations. He is, Dan Pilla, author of Small Business Tax Guide, The Complete Guide to Organizing and Operating Your Small Business. Of course, Dan, the best step would be ahead of time to read the book, understand the information. If we run afoul, can we give you a call?

Yeah, yeah, absolutely. Anybody that orders a book off my website, Peter, taxhelponline.com, that's all one word, taxhelponline.com, you order this book from my website, and you will get a free 15-minute consultation directly with me personally, not my staff, me. But you got to buy the book from the website, taxhelponline.com, and you can get all the information there on this book and the other materials that we have available to help people with IRS issues.

Well, it's a great book, lots of information. If you are looking to stay in good shape, be proactive, not run afoul or get into any gray areas, I would suggest picking this one up and reading through it, taxhelponline.com. Again, author Dan Pilla, Small Business Tax Guide. We appreciate your time. Thank you. My pleasure, Peter.

Thank you. Well, again, taxes, as with many other topics, but taxes being a big one, such a huge part of running a successful business. You've got to be on top of the tax situation of your business and on top of the taxes to run a successful business.

Not being on top of it can cost you big time, and in fact, it can even cost you your business. Let's make sure that we are staying informed, up to date. Dan Pilla's book, a very good resource to understand some of the complexities and some of the solutions to address them, so we appreciate Dan joining us on the program. Now, if you've got questions about your personal planning and would like to look over any topic, whether it be your financial, investment, retirement planning, your forward-looking tax approach to keeping the most of your money, feel free to be in touch.

We always enjoy and appreciate hearing from listeners to the program and do offer the opportunity for a complimentary review of your situation, a strategy session for your financial and retirement planning progress. You can be in touch with Rashawn Planning by calling 919-300-5886. You can visit us online, richonplanning.com. We always encourage you to please like and subscribe to the podcast channel on your favorite player, or again, be in touch. Give us a call, 919-300-5886 or visit online, richonplanning.com.

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