Tax Trolls Episode 7- End Of Year Tax Tips, Travel Expenses, Kayne West Tax Bill | CPA for Startups
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:
Lenard: Hello everybody, this is Lenard de Guzman and Argel Sabillo. We are the tax trolls. Welcome to the podcast and in this podcast, we're going to go over, since it's the end of the year, how to plan your year-end taxes and also how to lower your tax bill. We got some speakers Argel is going to show us. Before we get into it a quick disclaimer this podcast is only for entertainment purposes only if you have any issues with any taxes or any accounting please contact a CPA. So Argel, the end of the year we're getting close, is there anything you're seeing, anything that makes you nervous with clients?
Argel: Yes, nothing that will make me nervous for my clients but definitely just some housekeeping compliance requirement for like say before the end of the year there's estimated taxes so if you're profitable and you're expecting to be profitable by the end of the year, you want to make sure you pay your fourth quarter estimated taxes for your corporation and that's December 15. Also at the end of the year make sure that you're renewing your LA business license. These are just like housekeeping so that in case you get audited or as we talk later in this podcast like the different strategies you want to make sure that you're organized that's first and foremost.
That's how fortune 500 companies are are taking advantage of these like tax loopholes and tax planning and saving millions of dollars because they're organized and then they're pretty good with timing. Usually at the end of the year that's when you look at your books making sure that you can you have some room to play around and look at different strategies before the year-end. Oftentimes you go to your tax accountant in April and it's doing the tax return for the prior year or the year that just ended, at that point you can't
do any more tax planning so you want to make sure that you actually do this during q4.
Yes, just getting organized is first and foremost and making sure that you're complying with like all the due dates and requirements. Part of lowering your tax bill it's not getting audited and not getting assess a penalty and interest for stuff like non-filing.
Lenard: Okay, so with like the Trump tax, was it the job? I did a little research one of my notes here with the jobs and act tax credit right. No, act, the tax cuts and the job act.
Argel: TCJA
Lenard: Yes, I'm trying to say it, I'm like getting my tongue twisted. So what things business owners should be on the lookout for because that's like a big revision in the IRS code. I read something about the [inaudible 03:43] R&D tax credit and there's a lot more deductions and credits available. What changed over the course of the year?
Argel: I mean there's a lot of things that change that basically if I can summarize it basically screwed regular folks and rich people who are investors and also people who have money to invest properties. Also, I would say businesses benefited from it and so that's not a bad thing because one thing about the tax code it's not discriminating against anybody. It's basically if you know what they are and you have access to it and you know how to tax plan you can take advantage of those deductions as well and that's why something like you know the R&D tax credit or the Qbi to section 199a both of those things you can use to your advantage especially for audience who are business owners right.
I think if we haven't covered it yet basically my whole thesis is that there's no way that working for a 9-5 job will help you with taxes because there's not a lot of tax plan and you're limited to like the individual deduction that's continually getting face out. So owning a business and making sure that you can legally move around between your personal and then your business and finding that way. Some things could be done you have to separate your business and personal but there are things that you can benefit by doing something for your business right. Does that make sense?
Lenard: No, it does. We're here we're the tax trolls people, we kind of troll them. So it's kind of like the politicians passed the tax code these things for I guess the people who fund them like the lobbyists. Of course, they're going to be in more favor of corporations which are like businesses right and then at the entrepreneur level they are business we were able to cut up certain entities corporation, LLC, S Corp and so like the ordinary person can take advantage of these deductions credits. So, what else is going on, we are talking about the end of the year obviously which like it's already it's going to be in November and then December. And so there's not much you can do like if I'm trying to like start a business or a food truck. If I were thinking about, is it better to start it like towards the end a year or would I be better off starting my kind of my food business towards like the beginning of the year and maybe start in January. What do you think of that?
Argel: I think from an organization standpoint like it's good to have that cut off and just like right now it's q4. I think there's a couple of decisions you have to make. One is that if you have a food truck and it's ready well you need to be out there selling right. Now initially with q4 I would say whatever revenue you can make from that food truck if you're not incorporated yet then definitely like have that come in as a sole proprietor income and as January 1st incorporate and then open a business bank account.
The reason I advise people to do that is because for example in California there's an 800 dollar minimum franchise tax that you have to pay and if you're a corporation your first year is free so if you open it now then your first year will be this short year and then so the following year you'd have to pay. So if you want to save on that wait for the next year. There's also a way where, I mean because it's q4 you basically have to file two tax returns one would be on your personal return in your Schedule C which is for sole proprietor and then you'd have to file a corporate return as well. So now you have your tax preparation cost increase and you have to file for that short year.
So I mean ideally you want to do it at the beginning of the year. I think for the most part it's out of your control where it would be like June, you're not going to wait till the next year to open your business. Just know that for the first year there's going to be most likely two separate filings; both for your sole proprietor if you were already conducting business or you're already consulting or freelancing and then they'll be like corporate return once you prepare your corporate return. The other thing that I would say is a good tax planning tip is that if you're already a business for, let's say you already have an LLC for 2019, what you want to do is look at whether or not you're profitable if you expect to be profitable by the end of the year.
If you do, you want to look into one how much do you think you're going to be profiting right because that net profit you'll have to pay taxes on it. There are things that you can do before year-end like you have expenses deductions that you know you're going to spend next year right. Then you want to make sure that you try to reduce that net profit so that you don't pay too much in taxes. For example, let's say, you're in on a cash basis and you have all these third party software that you have to pay a monthly subscription for right and they also like those annual deals you know you can sign up for those and just spend the money now so that your net profit is lower.
Lenard: Okay so I get the annual license now so then you can make a full deduction okay.
Argel: That way you're not waiting till the following year to take it right because if you wait till 2020 then you won't be able to claim your deductions until 2021 when you file your taxes. The largest deduction that you can actually do is by giving yourself a bonus or paying yourself more or giving your employee bonus like that's a big chunk that could lower your net profit. But you also have to think about what kind of structure you have because if you have a single-member LLC it doesn't matter if you give yourself bonus if you're still subject to a self-employment tax or payroll tax which is usually what kills a lot of small businesses and like solopreneurs and micropreneur because self-employment tax is like15.3% that's on top of your income tax.
So if you are netting a hundred thousand dollars like fifteen grand it's some so much you have to pay just on self-employment tax right. So you want to be strategic about how do you lower your self-employment tax. One way to do that is that if you're a single-member LLC you want to look into whether you should be an S corporation. What that does is that if you're an S corporation your business can then now hire you as an employee and now your business can then take a deduction and all the payroll that they're paying you including the bonus and then you become a w-2 employee. Now you do have to pay payroll taxes on your w-2 employee.
There's this tiny spread that you could take advantage of which is basically the passive income. I don't want to make this too complicated but just like think of it as like before 100% you have to pay payroll taxes now if you have an S corporation you pay payroll taxes on 70% of your net profit and then 30% of your net profit it's not subject to self-employment tax. It's like if I bought stocks right those are passive income those are not active right. Those aren't like subject to self-employment tax.
Lenard: Right so like on our example 100,000 you have to pay 15,000, would you be able to ever like 0 to 15,000 like whatever is able to go down based on kind of what you said can you cut it in half like just like 7,500 or how low would it be able to go?
Argel: Yes, there's no rule of this but it's safe so you can basically do a 70/30 split and that's what I was saying that 70% of that 15,000 is subject to self-employment and then 30% of the 15,000 you can basically save.
Lenard: Okay, you'll save 70% or 30%
Argel: 30%
Lenard: Okay.
Argel: But you can push that to like higher than 30% or 40%, it could be 50%. It's just a matter of how you can justify why you paid yourself less this year. The idea is that okay so if you're a solo business and I'm a realtor for example and I go out there and I'm like the only business employee or I'm the only person making the money and doing all those like selling homes. That's active right you're actively earning so that should be subject to payroll taxes. Now if I hire an employee and then now I have to pay payroll taxes on that employee because now he's the one who's actively running the business.
Meanwhile, I'm not part of the business anymore I'm not part of day-to-day there. I'm out there like branding getting the name out there, there's goodwill in that right. Our goodwill that's not subject to self-employment taxes okay, that's me trying to create a brand trying to create a company so that's passive income. Just like if I'm invested in a property that's a passive income, I'm not actively managing its generating revenue by itself. So kind of taking that concept there's an s-corporation in this company employ me or employ other employees and then I don't pay myself and I can justify that I shouldn't get a w-2 or I should get a small w-2 and the rest would be like passive income.
Lenard: Well this kind of tax code seems like it favors a lot of real estate companies and I mean Trump is a real estate mogul, so I guess it makes sense. I think we've exhausted that topic. You probably get a lot of questions on like travel expenses like for instance like if you're in e-commerce. I mean a lot of people go to Asia for manufacturing, do you get a lot of questions about what can you deduct? Are these ordinary expenses because a lot of time you're going in there and you're doing research or checking out certain I guess factories what basically the product they could produce for you. Let's get into that subject.
Argel: Yes, so I think that the misconception out there is that, there are two different schools right. One school is conservative and just like you don't detect anything you get audited. Some paranoid tax preparers out there who maybe they don't know a lot about the tax codes or they just want to make sure their clients don't get audited but they also leave money on the table and a lot of like entrepreneurs and taxpayers know this that they're like oh I'm not getting as much refund or deductions with the CPA I'm working with. Usually how we get some clients to switch to us is part of the reason is you're not tax planning or you're not taking a position that you can defend basically because that's all it is. It's your interpretation of tax code and to be able to like defend it if it gets questioned by the IRS. Now, on the other end, you have people just like flat-out like take a risk and take the deductions and mix their personal and business, right.
Lenard: Yes.
Argel: Now like the answer is somewhere right in between there or a little.
Lenard: From a balanced perspective okay.
Argel: So when it comes to travel I think the question is is this a business expense and if you're going a trade show make sure you have like an itinerary you can say but there's like a business purpose to it. If you're going to Asia right to see a manufacturing plant like it always helps to have some sort of documentation. Make sure that there are ways that you could actually make a combo trip for personal, for pleasure and for business right. You just want to make sure that the majority of your stay is for business. Not like okay I'm going to go to the manufacturing plant for a day and I'm going to spend two weeks on vacation.
That's not going to fly but if you can have some sort of like itinerary or like you have say 10 days and you have all these different schedule with different plans and in between you're taking breaks and vacation then that would qualify. So you just want to make sure that you're smart and talk to your CPA about how many days qualifies and can I hit up my airfare, my luggage, if you're in a hotel using their business center and you're printing stuff or if you're tipping the doorman or whatever like all those are traveling expenses.
Lenard: Yes, like the cab guy. Sometimes it's hard to drive in Asia or sometimes in places like Singapore, they drive on the other side of the road. So yes, I thought about renting a car and I forget about it.
Argel: If you are renting a car if you're taking uber. Now you can separate your business or personal on uber. Just make sure you have documentation of those and you should be fine.
Lenard: Okay, I think that's a good time to end the podcast. I know you've put a lot of words in this pod. Do you have any last words?
Argel: Let's see a bonus one. Another bonus tip here, well bonus news did you see the Kanye West thing.
Lenard: I saw him doing carpool karaoke on a plane but what's up with Kanye? He's like building a church or something now, what's up?
Argel: I think has a church now but I think he's he said that the year before he made like X amount of money but he was in debt and part of it was like he paid so much in taxes and in this year when he became a preacher he got a large refund check and he said it was because of God.
Lenard: No but they do the clergy write off, okay. So Kanye knows what's up with taxes. He must have a good tax adviser tax planning.
Argel: Well yes and I don't know if it's a coincidence that remember Kanye used to meet with Donald Trump like inside on like the TCJA before it even came out. TCJA happened last year.
Lenard: Yes because clergy they get on the deductions on the housing, the real estate, huge maybe we can cover that topic maybe we could have our church.
Argel: I don't know how many of our audience will be willing to take the deduction and be a clergy. But a couple of things, I'm just looking at it from a timing perspective. If he got a refund this year that means that he had a big windfall during the time that the TCJA was enacted and if it's a year before that he was in debt then that to me maybe he took advantage of the real estate planning. Because one and I don't know, I'm just speculating I don't know.
Lenard: That's why we are here man we are just tax trolls. We got to get some yeezy, he sold so many yeezies and here with taxes.
Argel: Well here's the biggest thing that came out of TCJA is that like I said the real estate planning and you know before there's an opportunity zone credit. This credit was if you're a company and you basically have your headquarters and hired people in an undeveloped like area where you see a lot of people with like no jobs or like lower economic background like if you're hiring there and you're continually hiring and increasing your headcount you'll get tax credits right and that was a huge thing for the past 10, 20 years.
Well, they got rid of that and instead, they replace it with if you have a real estate investment in an economic zone then you get some sort of like credit or deferment on your capital gains and assets right. So there are some smart people out there taking advantage of that and especially in the real estate profession industry. I'm not in that industry I don't want to be in that industry if you want to do like tax planning with like properties, I'm not the right person to talk to because I mostly just do businesses and corporations and I suppose the individual investors. More power to them.
Lenard: Alright so if you need some TJCA tip.
Argel: TCJA
Lenard: Come to the tax troll podcast and we'll see you next time. Alright take care.