Tax Trolls Podcast Episode 2- Zombie Companies and How To Break Up With Your CPA? | CPA for Startups

Topics on this episode: Zombie Companies and How To Break Up With Your CPA?

Disclaimer- This podcast is for entertainment purposes only. If you have any questions about taxes or any financial matters please consultant a professional accountant.

Transcription:

Tax Trolls Episode 2 – Zombie Companies and How to break up with your CPA.

Lenard: Hello, everybody, this is Lenard De Guzman with Argel Sabillo, CPA. We're the tax trolls here. We're going to go over some tax tips today and go over zombie companies, PWC's AI report and how to break up with your CPA. So, Argel, how's it going over there? 

Argel: Hey, it's going well. Once again, I'm at Central Park at seven o'clock in the morning, or what is it now 7:30? So, it's been nice again today. How's LA?

Lenard: Well I had my first sushi burrito. I went to a food truck here. I forget the name of it. Yes, it was like a pretty big, it was a pretty big burrito. I got a spicy too, and it was like a hand roll, but just monster size. So, yes. 

Argel: Wait you got it this morning?

Lenard: Not this morning I got a couple of days ago. It's early, it's 6:30 am local. I'm not a big, heavy breakfast eater. So, yes, you got to try it if there's a food truck there. So alright, let's get into the topic.

Argel: Alright. 

Lenard: Before we start, I wanted to start with a disclaimer. So, this video, this podcast is only for entertainment purposes only. So, if you have any issues or need advice get it from your CPA or let us give you advice here at well, you'd have to go to goodspring.IO, so let's get into the news. 

Argel: What's the news for today?

Lenard: Well, according to this article, right, I'm a bullish person about this recession coming up in 2020 or 2021 and there was this article that I caught my eye from South China Morning Post about how the next global recession will be triggered by zombie companies. Right. And so, these zombies if, you know, if the viewers don't know what a zombie company is, the company that runs on basically bailouts, the government, right. So they run their company, they just pay their note, barely making it. One of the things that caught my attention was like they're saying how the zombie companies and their cousins are these non-profitable companies right?

Like, you see it in the US with say like Uber or Lyft and then like we work with on that path, right? So, you know from this report is saying the next global recession will be because of the zombie company. And so, from like your perspective Argel like do you see these zombie companies or non- profit companies and what's your perspective on it? Like, is this really going to be the trigger? Will we have another global recession from it?

Argel: Those are loaded questions.

Lenard: We push the envelope here on Tax Troll.

Argel: Well, first of all, [Inaudible 3:56] I don't think it's going enough IPL. Which might be the best thing that has ever happened to that company compared to what Uber is dealing with now with like overblown valuations still not showing any profitability in the near future. So, Uber is probably one of those examples that you're talking about. Will, it triggers the recession? I mean a lot of things will trigger the recession, mainly because of the government bailout that happened. It reminds me of forest fires, right? Like, we tried to control forest fires by burning a certain section of the forest. Right. That way you control the fire from spreading, but over time, you do too much of that you'll get like bigger and bigger fires. So that to me is like the bailout in 2008. 

That has consequences down the line and only gets bigger and bigger. So, you're just basically moving the whole idea of capitalism and the fact it should be a free market. And the free market supposed to kill companies that are not, I mean it's basically survival of the fittest and when you have a safety net like what the government is doing, I think that will have consequences and sorry, I was going on a tangent there but in bringing it back to these zombie companies. I mean, this is something that just kind of like taxes one on one on most conglomerate most companies out there that basically try to skip paying taxes, right. 

Tax strategies, one of those things that for the longest time it's only available to the elites to the big companies. But over and over I keep saying this, you know, it's available for everybody, right? They just know how to access it. But basically, the idea here is that if you have a non-profitable company, you don't have to pay taxes this is something that Amazon is doing right? To me Amazon is probably the biggest zombie out there, the biggest zombie company out there because you look at the company is not profitable, so they're not paying any income taxes. 

They go into mutuality and [inaudible 06:46] and try to pin one government from another on where they shouldn't have their HQ and they asked these politicians to give them tax breaks. So that's what you're referring to as the bailout money or some sort of like subsidy, right, and so they get millions of dollars, billions of dollars from the local government. I think we talked about this in a previous topic of tax credits, right. And so in addition to that, you have Jeff Bezos who's he is not getting a paycheck from Amazon. So, he's not paying payroll taxes. Instead, he goes to Jamie Diamond and Chase Bank and he let them know that he's worth x billion dollars and that they shouldn't give him a personal loan.

 Lenard: With the low rate like a super low rate, that's how he lives off and I read about this.

Argel: Yes, so he lives off of that and then now he's not paying payroll taxes. So, you know, that's classic tax planning for you. But when you're looking at like big companies, especially multinational conglomerate, now you're talking about how I can avoid paying taxes in a specific country, and every country is different. We have a progressive tax here. In Europe, it's much, much higher taxes, therefore. And I saw this person when I was in Big Four is that depending on which country you're dealing with, they're either super tax risk-averse, or they're super aggressive when it comes to taxes like Japan, for example, Japan just want to be compliant. They're not going to like [inaudible 8:50].

Lenard: Okay.

Argel: Yes.

Lenard: Now, let's. Okay go ahead. 

Argel: Oh, so reeling it back to the zombie companies, I think it's a tax strategy that will continue to happen. But I think for the viewers for the small business owners out there who's thinking about creating their company and their startups, and they're running losses in the company, I think one tip that I would say is that if you ever want to sell your company in the future, position your company where it's attractive to the acquire. And sometimes an acquire just acquire a startup because they have a lot of losses, or they have tax credits in their books. Because once you're acquired, the parent company can then use your losses and your credits to offset all their income. And that's how they do it in these different subsidiaries and zombie companies getting losses because it flows up to the parent company that ultimately won't have to pay a portion of their taxes because of the tax benefits that they [10:00] get from the zombie company. So position your company [inaudible 10:04].

Lenard: That's a good tip for anybody looking to be acquired. Okay, let's go to the next topic since you have Big Four experience. PWC came out with this report on how, in the next few years AI and, you know, automation is going to replace a lot of workers in the work zone, it's going to be massive job losses. And one of the things that caught my eye was that they quote Bill Gates on this article, and Bill Gates said something where the threshold like the amount that he thought like $50,000 and in below, these workers would be replaced by some sort of automation, right? 

And so, like, people, you know, there are two couple solutions, right where Andrew Yang, you know, the Democratic presidential nominee says we should have a universal income everyone should get $1,000 a month. Right?  So I kind of briefly read about how you would collect, like back taxes like what they do, I think in Europe and I think in Asia. Can you go over number one, like, how does PWC generate this report? And then also like, what's your perspective on collecting the universal income? Like where does that leave people? Are you going to pay more taxes or how does that work?

Argel: Yes, so the PWC report, I reviewed it and my understanding is that most of the jobs that are going to be that are threatened are low paying jobs that don't require a lot of education. Right? I think mostly manufacturing jobs and customer service jobs like McDonald's cashier, right. I walk into McDonald's, I don't go to the cashier I go to the kiosk and order and then pick up my order, right.

Lenard: You don't want to look someone in the eyes, you're like, I'm just pushing the button.

Argel: Well, the thing is, I think, over time too what happened is like people are so unhappy with their jobs that they just give you attitude, or they have a bad day. So, you get a mixed bag of emotions every time you walk into a cashier. Whereas, when you walk into a kiosk and you can expect consistently, [inaudible 13:00], unless you start seeing ads, or some sort of like upsell, while they're like showing you the menu. I mean, that's going to be the future. But right now, it's not annoying yet. But I think if you look at the specialized jobs especially in accounting professionals, I think those things can be replaced. You can definitely make it a lot easier to collect information too.

A classic one would be QuickBooks and what QuickBooks is trying to do. They advertise marketing-wise that this solves your bookkeeping problem, but every business owner out there you talk to, they sign up for QuickBooks, but nobody's actually doing the accounting and the translating of the financial data. So, what happens is the small businesses that over the years, they only see how much is in our bank account and they see what's on their bottom line, but it's not accurate representation because nobody is taking care of it. So my conclusion of that is that you're always going to have a tech to solve a lot of these administrative problems, which enhances everybody elses ability to be more consultative and to be more like using their expertise in order to help other clients, for example. 

So, to me, what Andrew Yang is trying to do which is giving everybody $1,000 a month, that obviously you need tax money in order to make that happen.1000 a month is actually not a lot of money 12,000 a year and I'd be interested to see if that's going to be something that you report on your tax return and claim [inaudible 14:49] on it. Yes, so it's like after-tax or pre-tax, but we'll see what that is going to be but in terms of how do you generate revenue in order to tax that, I think you know what Bill Gates is saying what Andrew Yang saying is we need to start thinking about how to tax robots, right? These robots are the ones replacing the job. 

And so, I don't know, I'd be interested to see what that looks like. In Europe and Asia they have value-added taxes, from manufacturing to distribution to retail, it gets tax at every level. I mean, I can see something like that the robots from the parts that will build the robots will get tax. So, the raw materials will get tax the manufacturer that put together the robots will get tax, some sort of tax on electricity on how many hours the robot is working. Right. Yes, I mean, that's where I can see tax is going and or it could be the economic, output of this almost like a minimum wage, right? 

It's like, okay, this replaced a person who's bringing in like $20,000 a year in revenue for the company or 200,000 a year in revenue for this company, then we'll take a piece of that and tax it. Kind of like what we talked about last time is base on economics, as opposed to base on location in terms of how the state taxes e-commerce companies. I'm telling you, that's the start once they're in taxing your sales tax next thing they're going to be taxing SAS company and robots. They just need to be able to create a framework on how to tax but I think it's a smart move. I think it's the right move, because otherwise if the government doesn't update the tax laws, like e-commerce.

It’s very generalized on what's written on the tax laws in regards to e-commerce, computers. We need new laws. It's time to have new laws when it comes to taxes, because the environment has shift. We're not in retail anymore. Like, these laws were written when manufacturing was like the biggest companies in the world now techs are the biggest companies in the world. So how do you tax the big tech? There was actually a podcast I was watching about breaking up the big techs, the big tech company.

Lenard: I think yes, I think Facebook will eventually be like a utility, like can you imagine 20 years from now you get tax for, clicking on a like. Give me something like you're saying there's going to be so much like electricity, taxing the environment. Now, let's say like a viewer.

Argel: Wait, hold on, I would say the clicking on likes. That's actually happening now in the US, but instead of like, it's more of what do you call this? I don't want to get into the specifics, but it's when you drop cookies or when you make revenue from ad targeting, or for example. Okay, so let's take this, and very granular form. So, when you buy a banner ad on Google ads, it shows everywhere, right? And so, let's say I create a banner ad and then Google has all these different network partners of all the different websites out there, and that's where they're going to show my ad, my good spring ad. Well if somebody in New York saw that ad on while reading Financial Times, then when they click that ad, that's ad revenue in that state. 

Lenard: Yes. 

Argel: So, you're supposed to be tracking your ad revenue per state. 

Lenard: Yes. 

Argel: And so, think about where you're liking it. So, if you like it in, you know, in Texas, then that revenue should be attributable to Texas.

Lenard: That's next level. Let's not, let's say, your next level if viewers really like, what have to say right, and they've been with their CPA for like 10 years, right? How do you pretty much break up with your CPA and then like, if not, you'd like move on to another CPA. Like what docs you need, what closures? Do you need to write them a letter, or do the next CPA handle it the transition from the next [20:00] with New CPA to the old CPA. How does the whole process work?

Argel: Right? Yes. So, from CPA to CPA, on the professional level, we're not allowed to reach out directly to a previous CPA, we would need to get the authorization of the owner or the owner has to introduce us, and then we can work with them directly to ask for the information.

Lenard: Okay.

 Argel: But if you don't have that as an option, what you want to make sure is that before you break up with your bookkeeper, accountant, tax repair, CPA, you want to make sure you have the latest documents. So, let's say they are your tax return. Oftentimes maybe they'll give you the draft returns to review, but they forget to give you the final sign returns. So, you need those things in order to give it to your new CPA. And then, in terms of your financial statements for your business, you need to be able to like have your most up to date financials. You want to make sure that whatever is reported on your tax returns, whatever amounts you claim is your revenue and your tax returns, you want to make sure that that agrees to the financial statements that your CPA gave you. 

Because sometimes what happens is, there are updates on the returns, there are updates on the QuickBooks that those two ended up not matching. And so if ever you get audited by the IRS, the first thing they're going to ask is like, give me your financials. The first they'll look at is like, how much gross revenue did you make on your QuickBooks that you reported versus what did you report on the tax return? If those don't agree, that's an automatic audit right. So, first and foremost, you want to make sure those agrees. You want to make sure that you have your invoices.

If your CPA was helping you with your accounts payable, accounts receivable, want to make sure you move that over. If you are an e-commerce, you have inventory. So, you want to make sure that you're tracking all your inventory from beginning to ending in any purchases so that like your new CPA can continue tracking what you've started. You also want to make sure that you have from your CPA, your depreciation schedule. So, if you have fixed asset or capital expenditures that your CPA was helping you depreciate your new CPA needs a copy of that schedule in order to continue where they left off. I would say those are like the basic things that you need to get started.

Lenard: And then is there a best time of the year to transition because obviously, if you're running fiscal or you're running the April 15 deadline, is there like where you're like, this is going to be a pain if you decide to switch, the week before April 15th, right? Are they're the best time where your transition?

Argel: I'd think the best time is now. I think the best time is right away.

Lenard: It's possible. Okay.

Argel: And the reason I say that is, if I would say before the end of the year, so, because there might be some tax strategies that your new CPA uncover, and to give you that advice before the next year, right. Otherwise, because tax returns due April 15, any tax planning happens four months before, right. Before the year is over, once the year is over, then you're going to have to wait a full year in order to realize those tax benefits that you've implemented. So, I'd say before the year and make sure you talk to your CPA and new CPA, transition it over and make sure that they're helping you tax plan as well for the upcoming year.

Lenard: Okay, that's good advice. I think we can end the podcast right here. Do you have any closing remarks?

Argel: I think that every business owners out there should either go to their CPA or seek someone who can give them an audit of how their businesses doing some sort of like financial checkup, including looking over your tax returns and making sure that one, there's no errors, but also to look whether or not there's opportunity to do tax planning. Oftentimes with your existing CPA, they are handling so many clients that sometimes they do the monthly reporting, but sometimes they don't have time to review or have that meeting with you for updates on how you're trending and what's your plan for the future? So, make sure you're constantly talking to your CPA.

Lenard: Yes, and then plus it's hard because CPA have to be, I mean, the tax code changes every year and some things are coming in the pipe. Yes, so be aware of that. Okay let's end it here. So, we'll see you next time on the next tax troll episode. Thanks.

Argel: Alright, see you next time. 

Lenard: See you Argel.

Argel: Alright.

Lenard: Bye-bye.