Are You a Big Enough Fish for Tax Planning?

by Mar 3, 2020Blog, Uncategorized3 comments

We get this question a lot.

It is always some form of “How much money do I need to make before I can consider a tax plan?” We hate to do it, but we usually answer that question with another question: “Would you rather have money in your bank account, or in the bank account of the IRS?

What I believe business owners are really asking here is “Am I too small to work with your team?” While there are indeed some instances where you as a business owner may be too small, frequently the answer is an emphatic “no.” You aren’t too small. Worst case scenario: if you are too small we can find someone that will fit your needs and hopefully still give you a few pointers during our conversation. Whether or not you sign on with us, we will always be looking out for you going forward. Looking out for you, no matter your size, is how we make money.

Recently, a younger business owner in my network asked me if I would look at a tax quote for him. He is in his mid-to-late 20’s and just getting started in his business. The tax quote from the CPA group looked pretty reasonable to me; it was about $5k, and this would help him switch his entity to a better structure, cleanup his 2019 books, and do his return.

My question to him:

What is your CPA doing to decrease your taxes in 2019, and how are you going to keep your taxes low going forward as your business makes more and more money? I didn’t see any language or pricing in the quote I reviewed for tax planning, and that was the concern I wanted to share with him.

He felt as he was too small of a fish for tax planning as his company only made $90k in revenue. First off, I applauded him as that is a pretty damn good number for his industry especially in year 2. Then he told me he expected to make closer to $150k in 2020.
After doing some back of the napkin calculations quickly I let him know to expect a tax bill of around $18,000 after the CPA does his return.

One thing that is consistent in every human being I have ever met is it doesn’t matter if you make $9k a year, $90k a year, or $900k a year NO ONE LIKES TO PAY TAXES. It is the one common bond every US Citizen shares.

Fast forward to this week when we got an email from this business owner saying that the $18k number we had discussed a while back was spot on. So we set up a quick call, and during this call we dug into the important things that would help us understand his business, such as:

  • Entity structure
  • Office setup
  • Discussed the future of his business in 2020 and beyond
  • Learned how he spends his money currently
  • Savings goals

After our conversation was over, we put pen to paper and developed some strategies that
focused on some areas where there have been some tax leaks. We identified that we could help them implement a few strategies that should result in him only owing the IRS a little over $11,000. Thus, a potential tax savings of $7,000 on someone who made around $90k. He was pretty excited. The even sexier part of this is that is not going to be a one-time savings. He will save that amount every year, and probably even more than that as long as he owns his business and is making at least $90k/year.

On that note, one thing very important is making sure you are continuing to generate wealth. As we had already discussed some cash saving goals with this individual, it made it a lot easier to hit those targets since he is keeping an extra $7k per year in his pocket. Remember: this $7,000 is rightfully yours and does not belong to the IRS. Unfortunately, too many business owners let the IRS get an unfair share of the money they made.

So let’s really analyze what happened here. If this younger guy decided to stay with the group that initially quoted his taxes, then over a 10 year period he would have paid at minimum an extra $70,000 to the IRS. That is real, actual money right out of his pocket that he should never have paid to the government.

Here is our extra mile vision for him: he takes that $7,000 and invests it every year. Financial planners love to use a growth rate of 7.5% so that is what we took — and after ten years at around 7.5% he will have $106,456. Would you rather have paid $70,000 extra in taxes, or have another $100k in your bank account? Also, once that individual starts making $200k and $300k it will unlock some additional strategies that can be implemented.

“How much money do I need to make for tax planning” is never a question that should be asked. Instead, you should be asking yourself “Can I afford not to do tax planning?” If you are that business owner who is making $90k, don’t be scared to go talk to someone. It will be a lot more expensive in the long run if you wait until you are a big enough fish for the advice.

3 Comments

  1. Brian Lang

    Agree? Disagree? Let me know what you think.

    Don’t be shy.

    Reply
  2. Jeff

    I have no idea where to start with this. Not sure how to actually afford a decent tax strategist. Thoughts?

    Reply
    • Brian Lang

      This isn’t as big a problem as you might think… some companies won’t negotiate pricing at all, but reasonable people will. Let’s talk — shoot me an email. brian@upsidecfo.com

      Reply

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