Navigating Personal vs. Business Taxes for Business Owners

Speaker 1 – 00:00
If you’re a business owner, if you’re in the seven figures of income that you show on your tax return, the stakes are
pretty high. Because your business is probably demanding a lot of cash to keep running.
Speaker 2 – 00:09
The tax code has become so complex, simple W2 employees can run into surprises. But when you start getting
into business owners, it gets more complex.
Speaker 1 – 00:16
This is very important planning that should be done from a tax, financial planning, business planning perspective.
Speaker 2 – 00:22
Married together it’s one of the most important things as a business owner is managing your books and records.
Not only does it make tax time way more seamless, it also helps you plan for taxes throughout the year. Cash flow
and taxable income are two like really completely different things.
Speaker 1 – 00:40
Most business owners think they’re the same thing and that can make dramatic impact in what you think you’re
going to owe versus what you actually owe.
Speaker 3 – 00:47
You’re a business owner, you want to run your business, you want to focus on your business, you don’t want to care
about book to tax adjustments. That’s why you have us.
Speaker 1 – 00:56
All right, welcome everybody. Excited. This podcast, we’re speaking to business owners, especially, you know,
small to medium sized family owned businesses. The tax surprises and the complexity requires extra calibration. It
really depends on what kind of business that you own. But the reality is if you’re a full owner, let’s say 100% of a
partnership of a S corp or a majority owner of a LLC partnership, a lot everything from a the company is going to
flow through you no matter whether you take the money or not. Anything that’s not deductible, if you keep cash in
the business, if you know, bought, if there’s inventory management that’s fluctuated through the year, that could all
have pretty dramatic effects on your tax return. And this could all be if your cash basis, accrual basis. If you’re a
hybrid method, that can all come into play.
Speaker 1 – 01:52
So if you’re a business owner, if you’re in the seven figures, you know, of income that you show on your tax return,
the stakes are pretty high because your business is probably demanding a lot of, you know, cash to keep running.
You’re probably the bank behind it, maybe you have lines of credit, but ultimately, you know, you’re the life support
of it. So this is, you know, very important planning that should be done from a tax, financial planning, business
planning perspective. Married together yeah. So Tyler, Nick, tell us what we just do an 8020 analysis. Let’s talk
about like the top three to five things that you’ve seen impact from a surprise perspective and how people can
proactively manage that moving forward. If you’re a business owner.
Speaker 2 – 02:33
Yeah, I think, well, obviously taxes are the biggest thing, but I think to take a step back before we even get into the
tax side of it, I think the number one most important thing is to have accurate books and records. Too often we
see, you know, it’s tax time, we’re getting clients that, okay, well, here’s my income, here’s all my 1099 income. They
have no idea what their expenses are. They have to go back 12, 14 months, try to compile them. So I think that’s
one of the most important things as a business owner is managing your books and records. Not only does it make
tax time way more seamless, it also helps you plan for taxes throughout the year. If you don’t have an accurate P
and L, you know, first, second, third quarter, how do you know what estimates to pay?
Speaker 2 – 03:25
How do you know what you can kind of take out and pay yourself, pay your staff? So that’s one area I think is
extremely important is to either a, hire a sophisticated bookkeeper to manage it for you or if you have, know, few
transactions, say less than 25 transactions a month, maintain Excel spreadsheets. You could purchase
QuickBooks for 50, $75 a month. But the value that provides not only to us, but to the taxpayer, I think is really
important. And kind of one way that I, I’ve always advised is really try to avoid intermingling funds. Because very
often we see, you know, a business owner that they’re the 100% owner. They don’t have any employees. It’s
basically just them. They have one checking account.
Speaker 2 – 04:24
So they have one account that’s, you know, paying their personal expenses, or mortgage, their car payments,
whatever their income from the business goes into that account. They’re also paying business expenses out of
that account. And so when it comes time to try to figure out what the tax impact’s going to be, it’s just a jumbled,
huge mess. So I always advise to keep everything as separate as possible. Open checking accounts in the
business name, open credit card accounts in the business name, and anything that is for a business purpose run
through that. And then it kind of creates a record keeping and a P and L on its own for you because you can extract
transactions from bank data, see all your expenses, send those to us.
Speaker 2 – 05:07
We can categorize them, organize it, and then have a good idea of how, you know, Big picture, it’s going to affect
your financial plan, your tax payments, everything like that. So I’d say that’s in my eyes a very important part of it
recently.
Speaker 1 – 05:22
I’m just thinking of a client example that is an S corp. He was paying himself like a $300,000 salary. You know,
small company probably, I want to say like know 20 employees. The profits of this business were when. So he was
going by basically pulling like a monthly profit or loss statement. And so the end of the year the profit of the
business showed like 2 million bucks. Right. So he basically his total income was his $300,000 salary. He was
100% owner of this escort. So 2.3. So he, you know, he did the calculations based upon the 2.3. And this is before
he became our client. Now the reality is when we looked at his books, there was a lot of cash flow that was
occurring a lot of your tax basis, meaning there wasn’t. Life insurance premiums are not deductible.
Speaker 1 – 06:09
Meals taking as a service based business, taking clients out, those are only half deductible. That was a couple
hundred grand.
Speaker 2 – 06:15
Country club dues.
Speaker 1 – 06:17
Country club dues. So there was you know, essentially about a half a million dollars that he thought was an
expense that really showed up as an income. So when I’m, I don’t know, I’m just rounding numbers. So he thought
his income was 2.3. He paid his federal, you know, his estimates based upon that. But in the reality his AGI was
2.8. And we see this pretty common in a single owner business because you know, you are running a lot of stuff
through your company but knowing what’s deductible, that actually arrives at that 2.3 versus what’s not deductible,
that’s a half million dollars that he didn’t realize is going to show up as taxable income to him. And at that level he’s
already through the highest rates. That’s 37 Fed, that’s 3% state. He’s in Pennsylvania, 3.07% state, 1% local.
Speaker 1 – 07:02
The Medicare, you know, the double Medicare or the Medicare surcharge. He’s an S corp, so he avoided the
Medicare, right? Yeah, so, but still, I mean that’s, that’s 41% right off the bat of half a million dollars. So he was
surprised. Why 200 grand?
Speaker 2 – 07:18
Another big item is debt payments. So if you finance a vehicle, equipment, the, the payments on those loans are
not deductible. So yeah, cash Flow and taxable income are two like really completely different things. Yeah, you
can, we get, we see.
Speaker 1 – 07:34
Often that most business owners think they’re the same thing.
Speaker 2 – 07:37
Yeah.
Speaker 1 – 07:37
And that can make dramatic impact in what you think you’re gonna owe versus what you actually owe.
Speaker 2 – 07:42
Taxable income’s 500,000. Well, I only have $200,000 in my account. How am I possibly taxed on $500,000
because of that?
Speaker 1 – 07:50
Is all your country clubs and all these things? Yeah. And so that’s another, I think the car thing’s important because
a lot of people will buy that 6,000 pound plus car, take a $100,000 deduction. You know, I don’t know what the
percentages are now. If they buy it, you know, it’s obviously. What’s the percentage that you can deduct it?
Speaker 2 – 08:05
They’re 100.
Speaker 1 – 08:06
Oh, it’s back to 100.
Speaker 2 – 08:07
Yeah.
Speaker 1 – 08:07
So. And then, but you’re saying if they just finance that you might.
Speaker 3 – 08:11
Be paying it for five years.
Speaker 1 – 08:12
Maybe it’s three grand a month you’re paying. And that three grand a month is not tax deductible. So you got a
really nice deduction. Now you get a little bit of interest deduction, but then that’s an after tax payment that you’re
100% owner of your S corp. You’re taking that on as taxable income. So now that’s a really good example. So let’s
move from anything else you would say as a single business owner versus like if we move into an S corp that has
multiple owners versus or a partnership, that’s multiple owners. Because this can, it’s kind of you’re married. Right.
If you’re a multiple owner, it’s like what the company does is going to affect everybody. So anything else from us,
like a single business owner that you guys would say is important to cover?
Speaker 3 – 08:52
No, I don’t think so.
Speaker 1 – 08:53
Okay. Let’s move into a multi owner business escort partnership. I think it, there’s a couple nuances with how
Medicare tax could work on the two or local, you know. But what do you see most common surprise clients if
they’re a shareholder in a company, maybe there’s 10 people or five people. Whatever example you want to use and
use some specific examples if you don’t mind.
Speaker 3 – 09:16
Yeah, absolutely. I can take this one. So a lot of times what happens is, so when you’re, you know, say for your
example, there’s 10 shareholders, you all own 10%. Just for ease, let’s Say the company net taxable net income for
the year is million bucks. Right. That’s 100 grand a person. That is what you’re going to end up paying tax on the
100 grand. Now, that doesn’t mean the company distributed a million bucks in cash out to the partner group. Right.
So you might have gotten 75 grand in cash, 50 grand in cash, but you’re paying tax on 100 grand income. So again,
that’s kind of a low threshold. I mean, we can see. We’ve seen scenarios where that gets up more in the.
Speaker 1 – 09:57
That’s you. You got 10,000, but you’re owing 37,000. So you have to.
Speaker 3 – 10:03
On that point, it’s like, it’s a surprise to me.
Speaker 1 – 10:06
Why do I own this company? I owe 27,000 just to be a part of it. Correct.
Speaker 3 – 10:10
Yeah. So then it’s a huge surprise to you because you’re like, well, I paid estimates on this. This is what I got per
quarter. But in reality, that amount you got per quarter wasn’t what the company actually earned that quarter.
Speaker 1 – 10:20
6 / 9
Yeah.
Speaker 3 – 10:21
And you’re paying tax on what they.
Speaker 1 – 10:22
Earned, hoarding cash on the balance sheet.
Speaker 3 – 10:23
Correct.
Speaker 1 – 10:24
You’re personally covering a tenth of the tax liability to build that cash up.
Speaker 3 – 10:28
Yep, exactly. And then. And what happens is sometimes the company’s not always transparent about that. So they
might say, oh, yeah, hey, this quarter we’re going to distribute $100,000 to each partner, but they’re not going to tell
you what the actual taxable net income is for that quarter. So then it’s a little bit of a guessing game. And again, if
you’re in the 37% bracket, that adds up very quickly one way or the other. Right. So it causes a lot of surprises.
There’s really no perfect approach because we don’t want you to overpay your estimates and get a huge refund. It’s
like the last thing we want you to do. We want to kind of get you in, like, that 10 to 15,000 range.
Speaker 1 – 11:03
Sweet spot. Yeah. Yeah.
Speaker 3 – 11:06
So I think it just requires constant communication. And if you can get answer from your cfo, from your. From your
boss at your company, the.
7 / 9
Speaker 1 – 11:12
CEO, or get us the contact with Pepper.
Speaker 3 – 11:15
Right, yeah. Get some sort of quarterly P and L so we can figure out some idea what your actual taxable income
number will be. Because just a distribution, that’s not what you pay tax on.
Speaker 2 – 11:25
And it’s a common thing, because if you think about it, companies, maybe. Maybe they’re a big company, they have
5,000 employees. They have again debt payments they got to make. Most companies retain cash within the
business to, you know, for a month or two in advance to pay expenses. So at the end of the year if they retain cash,
you’re still paying tax on that cash that’s in the company. It’s, it’s pretty more common than you think that most
companies don’t distribute out every penny of profit that they make to the owners they want to help.
Speaker 1 – 11:54
You want a healthy balance sheet. Yeah, but that healthy balance sheet costs the partners a little bit too to build it
up over time. Yeah, perfect. Well, any other closing remarks? I think this is, you know, very specific to industry and
so we’re just talking high level. If you are manufacturing company or have a high inventory count versus if you’re
just a service based company entertaining clients. There can be surprises in both of those ways. But any other
closing remarks other than, you know, it’s a highly individualized calibration process that you need to go through
proactively through the year and not just like a guessing game at the end of the year?
Speaker 2 – 12:29
My closing remarks are the tax code has become so complex, even simple W2 employees can run into surprises.
But when you start getting into business owners, it just gets more complex. So my closing remarks are just be in
constant communication with your financial advisor, your CPA bother us. I mean we like to be bothered. There’s
nothing I hate more than telling someone they owe a huge chunk of cash for taxes in April. So just, you know, stay
in touch and you know, we’ll.
Speaker 1 – 13:00
When changes occur, cash flow swings occur.
Speaker 3 – 13:03
Yeah, I mean your business, we’re going.
Speaker 1 – 13:05
To proactively reach out. But a lot of times if you’re so busy and forget.
Speaker 3 – 13:09
Right.
Speaker 1 – 13:09
And we don’t know that you just doubled your, your profits or revenue. I mean we got it, we got to adjust.
Speaker 3 – 13:16
And you’re a business owner, you want to run your business, you want to focus on your business. You don’t want to
care about book to adjustments that you know, that’s why you have us reach out to us, tell us, give us a quarterly P
L. We’ll do the kind of the, you know, the accounting work that you don’t want to be doing.
Speaker 1 – 13:29
Yeah.
Speaker 3 – 13:29
And we’ll give you a better idea as to what your tax picture looks like.
Speaker 1 – 13:31
No question. Well, thanks for joining us everybody and catch you next week.