March 5, 2025 • 24 mins
Are you making these common tax mistakes in your small business? Most owners making under $1M are either overpaying in taxes or putting themselves at risk with the IRS - and they don't even know it.
In this episode, we unpack three key tax strategies specifically designed for businesses with under $1M in gross revenue. You'll discover:
- Why playing "small" to save on taxes might be costing you big opportunities
- The three tax "buckets" every business owner needs to understand
- Which complex tax strategies you can safely ignore (and what to focus on instead)
- How to make taxes work for your business growth, not against it
Key Quote: "Smart tax planning isn't about zeroing out your profits - it's about optimizing them. Every dollar in taxes means multiple dollars kept in profit."
Listen now to learn how you can build a tax strategy that helps your business grow while keeping you in the IRS's good graces.
View the Small Business Tax Strategy Checklist in the Wealth Wisdom Financial Community here: wealthwisdomfp.com/community
00:00 Introduction to Smart Tax Strategies
00:34 Welcome to Wealth Wisdom Financial Podcast
01:12 Importance of Smart Tax Planning
04:20 Strategy 1: Strategic Timing of Income and Expenses
09:00 Strategy 2: Maximizing Qualified Business Income Deduction
13:10 Strategy 3: Building a Tax Diversified Retirement Strategy
19:42 Simplifying Tax Strategies for Small Businesses
22:30 Conclusion and Next Steps
Watch Here: https://youtu.be/8hMHq_Hq0-U
Mark as Played
Transcript
Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
(00:01):
Are you leaving money on the table with
your business taxes?For business owners
making under 1,000,000, every dollar
counts. Today, we're diving into smart
tax strategies that could save you
thousands, and some of them might
surprise you.
In a world where chaos seems to reign
(00:21):
supreme, where uncertainty lurks around
every corner and financial markets are
now more unpredictable than ever. There's
one place you can turn to to find clarity
and control. Welcome to the Wealth Wisdom
Financial Podcast. Hey, I'm Brandon.
And I'm Amanda. Join us as we dive deep
in the world of personal and business
(00:44):
finance to assist you in navigating
through the chaos and building the
financial future you deserve. We believe
when conventional financial thinking
doesn't get you where you want to go, you
need wealth wisdom. So if you're ready to
take control of your financial.
Tune into the Wealth Wisdom Financial
Podcast because in a chaotic world, your
(01:06):
money shouldn't be. Subscribe now
and never miss an episode.
Welcome back. Tax season is upon us, and
if you're running a business making under
a million, you're in the sweet spot where
smart tax planning can make a
huge difference to your
bottom line. So first, some good news.
(01:27):
Congratulations. You've already done one
of the best things that you can do to
reduce your tax obligation. Overall,
you started or bought a business. Wait,
way to go. Good job. The Internal Revenue
Code has numerous tax advantages built
in specifically for small businesses,
so you're already set up to take
(01:47):
advantage of this. Now for the bad news.
Most owners either don't know about those
tax advantages or afraid to use them.
Perhaps rightly so, because
misuse of those tax advantages can land
you on the wrong side of the
Internal Revenue Service. And no one
wants that. I've talked to many clients
(02:08):
who have been on the wrong side and it's
not a fun place to be. Yeah. And actually
state, be sure you subscribe this podcast
because later this month we're going to
talk about what, how to stay on the right
side of the IRS and not get on the wrong
side and things to avoid and stuff. But
for today, we want to talk about like,
even though the Internal Revenue Code is
very long, very complex, there's
(02:30):
never a better time than right now to
get to know a few parts that likely apply
to you and use them to your advantage the
way they were meant to be used. So let's
get into it. Today we're breaking down
three key strategies that work
specifically for businesses with under a
million in gross revenue. And yes,
we're talking about your total sales
(02:52):
before expenses, not your take-home pay.
If you're making that, that's that's
awesome too. But we are focusing
on businesses that are making just shy
under a million. Yep. So speaking of
which, I see too many business owners
paying themselves salaries thinking it
saves on taxes. Here's the truth. Showing
healthy profits can actually help you
(03:14):
qualify for loans, attract investors,
sell your business down the road. Smart
tax planning isn't about zeroing
out your profits. It's about optimizing
them. Yeah, I see this all the time where
they're like, yeah, but I I made a lot,
but I just don't show a lot. And then
they try and get a loan
and they can't cause you know, all the
(03:34):
fun. I mean, it happened for us, right?
when we were moving into this business,
we could not buy a house because we
didn't show income yet because the
business was so new. And so you want to
show income. And then one quick reminder,
we're not tax professionals. This episode
will empower you with knowledge and ideas
(03:55):
to bring to your tax professionals, and
we're not giving any kind of individual
advice here either. Yeah, we have learned
a lot and we're just passing on the
knowledge. and knowing as a
financial person how the
tax code can benefit or
help you on the tax side as well. Okay.
Ready to get into the three strategies?
(04:16):
Yeah, let's go. Yeah, these are, there
are more, but these are our top three. So
strategy number one is strategic timing
of income and expenses. Understanding
when to accelerate or delay income and
expenses between tax years. Now
we're in March when this
episode's coming out. This is often a
(04:37):
topic for December or January or
probably actually October to prepare for
later, but you might be in a fiscal
year, right?So whatever it means between
tax years for you, you want to think
about this. You might have control over
your cash flow and can delay or
rush your accounts receivable, get people
(04:57):
to pay you earlier or delay them paying
you. Or you can build into your
contracts payments that fit into your tax
strategy. If you're negotiating a
contract in March that gets paid over
time, you can negotiate if you get a big
payment in December to get it all in the
tax year, or if you delay that into
January. In lower income years, you want
to accelerate payments to you, delay
(05:19):
payments going out. Set reminders in your
account receivable in December to make
sure and you're getting that income
in those lower income years and not
delaying it into the higher ones. Maybe
even give discounts that people will pay
you by December 31st. Maybe you
negotiate to defer some expenses until
January instead of paying them in
December. And then on the flip side, in
(05:41):
higher income years you delay payments to
you and consider moving up expenses
into the current tax year. So
you might have fewer account receivable
reminders prior to January 1st or change
the due dates on your invoices to be
January 2nd instead of by December 31st.
That can. That often delays people. They
(06:01):
don't pay until it's actually due. See
what kind of discounts you can get by
paying in advance in December rather than
throughout the next year. There's a lot
of moving things here. Remember,
though, under the cash accounting
method, if a payment is available to you
in one tax year, you aren't supposed to
defer it to the next. So if you negotiate
(06:23):
terms and you get people to pay you
later, great. But if the check is in your
mailbox and you can you leave it
uncashed, that's not a delay of income.
If you were able to cash it that
year and put it in your bank account that
year, it needs to be counted that year.
Delaying cashing that check to put in
your bank account doesn't delay the
income. Yep. And the December
rush to add expenses and reduce a tax
(06:45):
burden puts too many businesses in
jeopardy in the early part of the next
year, right?I see this all the time.
Again, it's better to have a grasp on
profit and tax strategy throughout the
year so you can make good decisions
during the business's natural ups and
downs, which probably don't correlate
with the calendar year and all the
(07:06):
craziness at the end of the year with
December. And all the fun things
in are at the end. I see it
like so many. I mean you know this you
you see it too like all the hey by
now do this and and we make big wrong
decisions. Now, again, strategic
decisions is a different story. Yeah, we
actually did a couple of podcast episodes
(07:27):
in December this past year where about
how people rush to make decisions in
December and then make bad decisions
'cause they're rushed. So I'm gonna give
you today two proactive ways that you
could do March, April, May, like
throughout the year, so that you're not
so rushed in December. So the first one
is setting up regular income and expense
tracking so you don't miss deductions and
(07:49):
you're making more intentional choices.
When you're negotiating that contract in
July, can you tell if you want the terms
to be paid this year or next year, or a
mix of both?If you can't, then you need
to have a better tracking system. Yeah.
And then the other way to be proactive is
be sure that you're working with a tax
professional where you can schedule a tax
(08:10):
planning review with that professional in
October each year to see how things are
looking for the year. And that gives you
more time, October, November and December
to make adjustments without feeling
rushed. Yeah. I mean, we've done this for
many years and our income has fluctuated,
right. So it's been helpful to have that
conversation. Again, we know a lot of of
(08:32):
this stuff since we've, you know, are in
the financial world. But talking to
somebody who is
licensed in that area, yeah, is really
helpful for us too. Cause things change,
right. I mean, the tax code is bigger
than the Bible. So you had to bring that
up. Yeah, it is. It is true. So that's
strategy #1. Be creative with when you
(08:54):
receive income and have expenses,
especially if you're in the cash
accounting method instead of the accrual.
Now let's go on to strategy #2, which is
about maximizing your qualified business
income deduction, what some people call
the QBI deduction or the QBID. I've heard
it referred to both ways. This is a
20% deduction that works for
(09:17):
businesses under a million. It's it works
for pass through businesses like sole
proprietors, partnerships, S corporations
and allows you to deduct up to 20% of
your qualified business income. Now what
is qualified business income?This means
that your share of the business's
profits. So it's not you can't deduct
your wages that you pay yourself. You
(09:37):
can't deduct your investment income or
any kind of capital gains. But of the
business's profits, those distributions
maybe that you pay to yourself, you get a
20% income deduction there, qualified
business income deduction. Now,
there are some business activities that
qualify and some that don't. Most trades
and businesses qualify, but there's some
(09:58):
exceptions. If you're in a service
business, that could be you,
health care, law, consulting. You can
face some limitations there. Rental
properties may qualify if you meet
certain requirements. Having good
documentation of your business activities
is crucial here. So you want to make sure
you and your tax pro are on the same page
(10:20):
about what your business activity is in
honesty and if it qualifies or not.
And then you can think of, you got your
activities set, then you want to think
about your structure of your business.
Consider how you pay yourself salary
versus distribution. If you're an S Corp,
find that right ratio there. Look into
the timing of your purchases and income
(10:41):
like we talked about in strategy one.
This is a good time to point out that the
QBID, the QBI deduction is set to go
away at the end of 2025. And so
next year, 2026, you may or may not
have this deduction anymore. So this
could be your last chance to use it. It
all depends on what Congress does this
year. So for 2025. Think
(11:03):
whether your business structure is
optimal for the deduction and if you need
to do any restructuring, and if it makes
sense for that, you know the cost to
restructure worth the savings that you
might get. Now we might have said a whole
lot of. Foreign language to you. You're
like, wait, what did she just say?This is
why you talk to a tax
professional or again, somebody
(11:25):
who's knowledgeable in this kind of
stuff, right?Yeah. So here's the things
that are in your power, some common
mistakes to avoid so that if you get this
deduction, you can make sure you get the
maximum deduction that you need. The
first mistake is not keeping clear
records of business versus personal
expenses. Make sure those are separate,
right?They should be separate. Again,
(11:46):
let's say your business records and
personal expenses should be separate.
Yeah. And then make sure your business
activities are classified the right way.
Misclassifying your business activities
is a common mistake. Third mistake and
not considering how other deductions
affect your QBI. If you're you have a
bunch of expenses this year and then the
(12:07):
QBI goes away next year, you would might
miss out on some of that 20% deduction
that you can get. And then finally
another mistake is forgetting to factor
in the deduction when making your
quarterly tax payments. Do not pay the
IRS in advance. It's an interest free
loan and this is coming out in March. You
might be making your first quarterly tax
estimate. very soon, you might
(12:29):
wanna have this kind of conversation with
your tax pro before you even send that
in. Yeah, I think a lot of times people
don't realize that. Again, say that
again. So if you overpay and you're
getting a refund later, they don't give
you any interest on that money, right?So
you wanna pay what you need to pay to
avoid penalties and fines and that kind
of thing. But if you overpay, they're not
(12:50):
gonna give you any kind of benefit. Yeah,
and I hear this again all the time where
they're like, ooh, I love it, I love
getting this refund. And I'm like, mm,
again, maybe it's a good thing, maybe
not. Yeah, I hear that less from business
owners, but yeah, still some business
owners. Yep. Okay, so make sure you're
using that Q bid deduction. And then
(13:10):
strategy number three is building a
tax-diversified retirement
strategy. This is where we move from
talking about taxation year by year
to talking about taxation over your
lifetime. A lot of tax pros like to
look really good and save you a lot of
money this year without
talking about what the implications are
(13:31):
for that 203040 years from now.
I mean, because again, that's how they
make money is sales of look what I did
for you now, but really we want to look
as a holistic approach of. you now
and you in the future. Yeah. So when
you're doing savings, whether it's for
retirement or contingency capital or the
(13:52):
what ifs, there's three different kind of
tax buckets. There's the tax delater,
like our traditional set buyer A or a
solo 401k that you get immediate tax
benefits. That's usually the go-to when
you're like, Hypo, what in taxes?Oh,
let's start you with a retirement account
and move money there and you'll reduce
your tax burden. Yeah, they, they do it
all the time. Again,Yeah, just remember
(14:14):
it's taxed later. Still still gonna
be taxed. Yep. The taxed now, these are
Roth and Roth like options for tax
free growth. Cash value life
insurance qualifies as that Roth like
kind of option. Better than a Roth I
think. Yeah, that's your opinion. And
then taxed never. These are things like
(14:34):
health savings accounts. That if you have
large health expenses now or in the
future, you can get a tax deduction now.
And then as long as they're used for
qualifying expenses, you never pay taxes
when you use it for those purposes too.
You want to just be careful you don't put
too much there and end up with this big
pile of money you can't use for health
and have to use it for something else.
And then you get a 25% penalty.
(14:57):
Kind of ridiculous. So now that you know
this buckets, which you might have
already known, but breath fresher. You
want to think about how to balance these
options based on your current tax
bracket. Like we said, most tax pros are
going to focus on saving you taxes this
year and put as much as possible into
that tax later bucket. But be sure you
(15:17):
have an honest conversation about your
beliefs about the future of taxes. No one
has a crystal ball, no one really knows.
But your opinion matters, right?And you
want to feel good about the decisions
you're making. So make a plan to reduce
taxes over your lifetime and for your
heirs, your beneficiaries, rather than
being shortsightedly focused one year at
(15:37):
a time. So let's talk about
why having multiple tax treatments gives
you more flexibility later on in life
in quote UN quote retirement or financial
freedom. Most people believe their income
in retirement is going to be lower, but
considering the following for you, our
small business owner. the tax deductions
you might lose, all those business
(15:58):
expenses that you currently deduct, or
the children who are your favorite tax
deductions, you might not have those in
30 years, particularly you might have to
pay your own cell phone bill, and that's
a personal expense at that point, all
those kind of things. Well, and then
also, again, if we're in retirement,
as we are aging, one of us, if we're
(16:19):
married, is going toMaybe
retire to heaven. And then that increases
taxes too, because you're now single.
Yeah, single tax brackets are way higher
than married tax brackets. Absolutely.
Also consider the retirement lifestyle
you want. Do you want to have a lower
income in retirement or do you want a
much higher one and continue to have that
growth mindset?Yep, especially with
(16:40):
inflation. And then also remember there
can be changes to the tax law and you
might lose some benefits like the QBID
that we discussed earlier, as we have
learned a lot that taxes can be changed
and things can be different in the
future. And so we want to plan now, but
also be prepared for the future.
But also know again, who knows what's
(17:01):
going to happen. Again, the tax code is
bigger than the Bible. It wasn't always
that way. There's always been added and
changed over time. Yeah. So the if you
have these three different buckets, those
different tax treatments let you control
more what your taxable income is going to
be. No matter how Congress changes the
tax code, a tax rates go up, you can pull
(17:23):
more from tax-free accounts. If they
go down, you can use your pre-tax money.
If there's a high standard deduction, you
can take that from your pre-tax money.
All kinds of fun things like that, having
money in these different buckets. Also
can help you manage things like required
minimum distributions, have more
flexibility with your Social Security
benefits, your Medicare premiums, if
(17:43):
those things exist at that point. And you
can just better control your tax bracket
by choosing which bucket you pull from
each year. So having options gives you
more control over the tax impact in your
heirs. And we're going to talk more about
this also in a future episode this month.
So be sure to subscribe so you don't miss
out. Yeah, I mean, I do want to say I was
just literally talking to a friend of
(18:04):
mine. Just now about his
dad who is in the 70s
and saying, oh wait, I made a lot of
money. I'm doing good. Now I need to
start thinking about this whole
RMD thing, taxes and and
planning on that. And he's like, I did
not realize all of these things. I did so
(18:25):
good of work and his his son is going to
inherit a blessing, maybe even a mess.
And so thinking about this before you're
seventy-two. Is really important. When
you're 40, when you're 20, start thinking
and building those foundations now.
And if you're like, no, I don't want to
do that, that sounds too complicated and
(18:46):
expensive and I've got more important
things to do. Stay tuned after the break.
Ready to take the next step towards
securing your financial future?Whether
you're planning for retirement, saving
for your dream home, or you just want to
(19:06):
make your money work harder for you, the
team at Wealth Wisdom Financial are ready
to assist you. And now it's easier than
ever to see how we might give you a boost
on your financial journey. Schedule a 15
minute discovery call with one of us
today and let's discuss your questions
and your financial goals together. Don't
wait any longer. Your financial freedom
(19:27):
awaits. Schedule your discovery call at
www.wealthwisdomfp.com/call.
OK, now we
know some of you are thinking. This
sounds complicated, expensive. Don't I
need a fancy accountant or a big budget
(19:48):
to do this stuff?Well, isn't this going
to eat up all my time that I need to be
putting in my business to grow my revenue
and keep things going?Actually, no.
Well, having a good tax professional is
important. Many of these strategies are
straightforward enough for any business
owner to understand and to implement.
So we want to clear up some confusion
(20:09):
that's out there. When you're making a
million dollars of gross revenue, you can
ignore some of those complex strategies
you might hear from bigger businesses.
For example, don't go chasing things
that are more of a worry of
international tax structures. Right.
You're probably don't need to worry about
that. If you have some real estate, you
(20:30):
might want to do some cost segregation
and pay the expense for that. But it the
tax savings might not actually be worth
it at your level. Complex trust
structures are typically overkill at this
level and you don't need to stress about
the corporate minimum tax. That's only
for companies making over a billion or
so. I think somewhere on there.
Definitely don't need to worry about
that. I mean, again, I see this a lot
(20:52):
where people are trying to figure this
out, and I'm like, dude, you need to what
you need to do is make money and
have a problem. Well, yeah, okay, so make
money, yes. But here's the bottom line.
Make money, but you also want to make
money as you focus on the fundamentals of
accounting first, right?Clean
books, proper documentation,
(21:12):
understanding basic deductions. Will get
you much further than chasing all these
complicated strategies meant for larger
businesses. These fundamentals are
likely to make your business more
profitable too, right?You're able to see
what's actually making money, what's
losing money, and trim the fat and build
a lean business and have more revenue
with the right products that actually
(21:33):
make more profits because you've got
clean books and proper documentation and
you know the deductions that you can get.
I think that's the thing. It's clean and,
uh, understandable, right?For you, right?
If you're trying to have all these
little, um, loopholes or,
or things that, uh, oftentimes we're
paying for the complexity and we're not
(21:55):
really receiving the results, whoever's
selling us on the other tools
that can save us, we, we realize, oh, we
saved taxes, but then we paid a
lot. I mean, I mean, think about it even
then. paying a tax
person to figure out how to avoid paying
taxes. It's kind of an interesting thing.
(22:16):
And also, a lot of these same things,
clean books, proper documentation, this
is also going to help your business be
more sellable or investable over time,
which might be worth way more than
whatever tax savings that you're chasing
after and trying to get. So remember,
tax planning isn't just about paying
taxes or paying little less taxes.
(22:37):
Is about understanding how to work within
the system to grow your business
efficiently. The strategies we talked
about today aren't loopholes, they're
intentional benefits that's put right
there in the Internal Revenue Code to
help businesses like yours succeed. So
use them. And if you wanna dig into this
more, be sure you hit that subscribe
button cause we've got some really
(22:57):
awesome episodes planned this month about
how to avoid getting on the wrong side of
the Internal Revenue Service and getting
audited and having to pay a, you know,
$20,000 of back taxes and fines and
penalties and everything we're gonna talk
about. Planning for a sell of your
business and how you can set up so that
you don't end up paying a whole bunch of
taxes. And when you sell your business or
(23:18):
your children don't end up paying taxes
and they inherit your business or you end
up retiring and living off the business,
still owning the business but not running
the day-to-day. We're going to talk about
how you save taxes at that point and so
much more. So hit the subscribe button
and don't miss an episode. And we got one
more goody for you. If you want to take
action on what you've learned today, head
(23:39):
over to Wealth Wisdom Financial Community
for your free small business tax
strategy checklist. Again, we said a lot
there. So having this little checklist
may help you. I mean, seriously, you got
to run a business. There's so much more
besides all that number stuff and tax
stuff. You didn't get in to do all of
that. You got in to sell the widget,
(24:00):
right?Um, so go download
Small Business Tax Strategies Checklist
at our community. It breaks down
everything we covered in today's episode
and simple, actionable steps that you
can start implementing right away. Plus,
it includes a bonus section on
record keeping templates that will make
(24:22):
your life much easier when tax time
rolls around 'cause, you know, having
simplicity and clarity. Um, I know your
tax guys will love that too. Yeah, maybe
save you some money too. Thanks for
joining us. Again, hit that subscribe
button and we hope you live long and
profit. The topics presented in this
podcast are for general information only
(24:42):
and not for the purposes of providing
legal, accounting, or investment advice.
On such matters, please consult a
professional who knows your specific
situation.
Are you leaving money on the table with
your business taxes?For business owners
making under 1,000,000, every dollar
counts. Today, we're diving into smart
tax strategies that could save you
thousands, and some of them might
surprise you.
In a world where chaos seems to reign
(00:21):
supreme, where uncertainty lurks around
every corner and financial markets are
now more unpredictable than ever. There's
one place you can turn to to find clarity
and control. Welcome to the Wealth Wisdom
Financial Podcast. Hey, I'm Brandon.
And I'm Amanda. Join us as we dive deep
in the world of personal and business
(00:44):
finance to assist you in navigating
through the chaos and building the
financial future you deserve. We believe
when conventional financial thinking
doesn't get you where you want to go, you
need wealth wisdom. So if you're ready to
take control of your financial.
Tune into the Wealth Wisdom Financial
Podcast because in a chaotic world, your
(01:06):
money shouldn't be. Subscribe now
and never miss an episode.
Welcome back. Tax season is upon us, and
if you're running a business making under
a million, you're in the sweet spot where
smart tax planning can make a
huge difference to your
bottom line. So first, some good news.
(01:27):
Congratulations. You've already done one
of the best things that you can do to
reduce your tax obligation. Overall,
you started or bought a business. Wait,
way to go. Good job. The Internal Revenue
Code has numerous tax advantages built
in specifically for small businesses,
so you're already set up to take
(01:47):
advantage of this. Now for the bad news.
Most owners either don't know about those
tax advantages or afraid to use them.
Perhaps rightly so, because
misuse of those tax advantages can land
you on the wrong side of the
Internal Revenue Service. And no one
wants that. I've talked to many clients
(02:08):
who have been on the wrong side and it's
not a fun place to be. Yeah. And actually
state, be sure you subscribe this podcast
because later this month we're going to
talk about what, how to stay on the right
side of the IRS and not get on the wrong
side and things to avoid and stuff. But
for today, we want to talk about like,
even though the Internal Revenue Code is
very long, very complex, there's
(02:30):
never a better time than right now to
get to know a few parts that likely apply
to you and use them to your advantage the
way they were meant to be used. So let's
get into it. Today we're breaking down
three key strategies that work
specifically for businesses with under a
million in gross revenue. And yes,
we're talking about your total sales
(02:52):
before expenses, not your take-home pay.
If you're making that, that's that's
awesome too. But we are focusing
on businesses that are making just shy
under a million. Yep. So speaking of
which, I see too many business owners
paying themselves salaries thinking it
saves on taxes. Here's the truth. Showing
healthy profits can actually help you
(03:14):
qualify for loans, attract investors,
sell your business down the road. Smart
tax planning isn't about zeroing
out your profits. It's about optimizing
them. Yeah, I see this all the time where
they're like, yeah, but I I made a lot,
but I just don't show a lot. And then
they try and get a loan
and they can't cause you know, all the
(03:34):
fun. I mean, it happened for us, right?
when we were moving into this business,
we could not buy a house because we
didn't show income yet because the
business was so new. And so you want to
show income. And then one quick reminder,
we're not tax professionals. This episode
will empower you with knowledge and ideas
(03:55):
to bring to your tax professionals, and
we're not giving any kind of individual
advice here either. Yeah, we have learned
a lot and we're just passing on the
knowledge. and knowing as a
financial person how the
tax code can benefit or
help you on the tax side as well. Okay.
Ready to get into the three strategies?
(04:16):
Yeah, let's go. Yeah, these are, there
are more, but these are our top three. So
strategy number one is strategic timing
of income and expenses. Understanding
when to accelerate or delay income and
expenses between tax years. Now
we're in March when this
episode's coming out. This is often a
(04:37):
topic for December or January or
probably actually October to prepare for
later, but you might be in a fiscal
year, right?So whatever it means between
tax years for you, you want to think
about this. You might have control over
your cash flow and can delay or
rush your accounts receivable, get people
(04:57):
to pay you earlier or delay them paying
you. Or you can build into your
contracts payments that fit into your tax
strategy. If you're negotiating a
contract in March that gets paid over
time, you can negotiate if you get a big
payment in December to get it all in the
tax year, or if you delay that into
January. In lower income years, you want
to accelerate payments to you, delay
(05:19):
payments going out. Set reminders in your
account receivable in December to make
sure and you're getting that income
in those lower income years and not
delaying it into the higher ones. Maybe
even give discounts that people will pay
you by December 31st. Maybe you
negotiate to defer some expenses until
January instead of paying them in
December. And then on the flip side, in
(05:41):
higher income years you delay payments to
you and consider moving up expenses
into the current tax year. So
you might have fewer account receivable
reminders prior to January 1st or change
the due dates on your invoices to be
January 2nd instead of by December 31st.
That can. That often delays people. They
(06:01):
don't pay until it's actually due. See
what kind of discounts you can get by
paying in advance in December rather than
throughout the next year. There's a lot
of moving things here. Remember,
though, under the cash accounting
method, if a payment is available to you
in one tax year, you aren't supposed to
defer it to the next. So if you negotiate
(06:23):
terms and you get people to pay you
later, great. But if the check is in your
mailbox and you can you leave it
uncashed, that's not a delay of income.
If you were able to cash it that
year and put it in your bank account that
year, it needs to be counted that year.
Delaying cashing that check to put in
your bank account doesn't delay the
income. Yep. And the December
rush to add expenses and reduce a tax
(06:45):
burden puts too many businesses in
jeopardy in the early part of the next
year, right?I see this all the time.
Again, it's better to have a grasp on
profit and tax strategy throughout the
year so you can make good decisions
during the business's natural ups and
downs, which probably don't correlate
with the calendar year and all the
(07:06):
craziness at the end of the year with
December. And all the fun things
in are at the end. I see it
like so many. I mean you know this you
you see it too like all the hey by
now do this and and we make big wrong
decisions. Now, again, strategic
decisions is a different story. Yeah, we
actually did a couple of podcast episodes
(07:27):
in December this past year where about
how people rush to make decisions in
December and then make bad decisions
'cause they're rushed. So I'm gonna give
you today two proactive ways that you
could do March, April, May, like
throughout the year, so that you're not
so rushed in December. So the first one
is setting up regular income and expense
tracking so you don't miss deductions and
(07:49):
you're making more intentional choices.
When you're negotiating that contract in
July, can you tell if you want the terms
to be paid this year or next year, or a
mix of both?If you can't, then you need
to have a better tracking system. Yeah.
And then the other way to be proactive is
be sure that you're working with a tax
professional where you can schedule a tax
(08:10):
planning review with that professional in
October each year to see how things are
looking for the year. And that gives you
more time, October, November and December
to make adjustments without feeling
rushed. Yeah. I mean, we've done this for
many years and our income has fluctuated,
right. So it's been helpful to have that
conversation. Again, we know a lot of of
(08:32):
this stuff since we've, you know, are in
the financial world. But talking to
somebody who is
licensed in that area, yeah, is really
helpful for us too. Cause things change,
right. I mean, the tax code is bigger
than the Bible. So you had to bring that
up. Yeah, it is. It is true. So that's
strategy #1. Be creative with when you
(08:54):
receive income and have expenses,
especially if you're in the cash
accounting method instead of the accrual.
Now let's go on to strategy #2, which is
about maximizing your qualified business
income deduction, what some people call
the QBI deduction or the QBID. I've heard
it referred to both ways. This is a
20% deduction that works for
(09:17):
businesses under a million. It's it works
for pass through businesses like sole
proprietors, partnerships, S corporations
and allows you to deduct up to 20% of
your qualified business income. Now what
is qualified business income?This means
that your share of the business's
profits. So it's not you can't deduct
your wages that you pay yourself. You
(09:37):
can't deduct your investment income or
any kind of capital gains. But of the
business's profits, those distributions
maybe that you pay to yourself, you get a
20% income deduction there, qualified
business income deduction. Now,
there are some business activities that
qualify and some that don't. Most trades
and businesses qualify, but there's some
(09:58):
exceptions. If you're in a service
business, that could be you,
health care, law, consulting. You can
face some limitations there. Rental
properties may qualify if you meet
certain requirements. Having good
documentation of your business activities
is crucial here. So you want to make sure
you and your tax pro are on the same page
(10:20):
about what your business activity is in
honesty and if it qualifies or not.
And then you can think of, you got your
activities set, then you want to think
about your structure of your business.
Consider how you pay yourself salary
versus distribution. If you're an S Corp,
find that right ratio there. Look into
the timing of your purchases and income
(10:41):
like we talked about in strategy one.
This is a good time to point out that the
QBID, the QBI deduction is set to go
away at the end of 2025. And so
next year, 2026, you may or may not
have this deduction anymore. So this
could be your last chance to use it. It
all depends on what Congress does this
year. So for 2025. Think
(11:03):
whether your business structure is
optimal for the deduction and if you need
to do any restructuring, and if it makes
sense for that, you know the cost to
restructure worth the savings that you
might get. Now we might have said a whole
lot of. Foreign language to you. You're
like, wait, what did she just say?This is
why you talk to a tax
professional or again, somebody
(11:25):
who's knowledgeable in this kind of
stuff, right?Yeah. So here's the things
that are in your power, some common
mistakes to avoid so that if you get this
deduction, you can make sure you get the
maximum deduction that you need. The
first mistake is not keeping clear
records of business versus personal
expenses. Make sure those are separate,
right?They should be separate. Again,
(11:46):
let's say your business records and
personal expenses should be separate.
Yeah. And then make sure your business
activities are classified the right way.
Misclassifying your business activities
is a common mistake. Third mistake and
not considering how other deductions
affect your QBI. If you're you have a
bunch of expenses this year and then the
(12:07):
QBI goes away next year, you would might
miss out on some of that 20% deduction
that you can get. And then finally
another mistake is forgetting to factor
in the deduction when making your
quarterly tax payments. Do not pay the
IRS in advance. It's an interest free
loan and this is coming out in March. You
might be making your first quarterly tax
estimate. very soon, you might
(12:29):
wanna have this kind of conversation with
your tax pro before you even send that
in. Yeah, I think a lot of times people
don't realize that. Again, say that
again. So if you overpay and you're
getting a refund later, they don't give
you any interest on that money, right?So
you wanna pay what you need to pay to
avoid penalties and fines and that kind
of thing. But if you overpay, they're not
(12:50):
gonna give you any kind of benefit. Yeah,
and I hear this again all the time where
they're like, ooh, I love it, I love
getting this refund. And I'm like, mm,
again, maybe it's a good thing, maybe
not. Yeah, I hear that less from business
owners, but yeah, still some business
owners. Yep. Okay, so make sure you're
using that Q bid deduction. And then
(13:10):
strategy number three is building a
tax-diversified retirement
strategy. This is where we move from
talking about taxation year by year
to talking about taxation over your
lifetime. A lot of tax pros like to
look really good and save you a lot of
money this year without
talking about what the implications are
(13:31):
for that 203040 years from now.
I mean, because again, that's how they
make money is sales of look what I did
for you now, but really we want to look
as a holistic approach of. you now
and you in the future. Yeah. So when
you're doing savings, whether it's for
retirement or contingency capital or the
(13:52):
what ifs, there's three different kind of
tax buckets. There's the tax delater,
like our traditional set buyer A or a
solo 401k that you get immediate tax
benefits. That's usually the go-to when
you're like, Hypo, what in taxes?Oh,
let's start you with a retirement account
and move money there and you'll reduce
your tax burden. Yeah, they, they do it
all the time. Again,Yeah, just remember
(14:14):
it's taxed later. Still still gonna
be taxed. Yep. The taxed now, these are
Roth and Roth like options for tax
free growth. Cash value life
insurance qualifies as that Roth like
kind of option. Better than a Roth I
think. Yeah, that's your opinion. And
then taxed never. These are things like
(14:34):
health savings accounts. That if you have
large health expenses now or in the
future, you can get a tax deduction now.
And then as long as they're used for
qualifying expenses, you never pay taxes
when you use it for those purposes too.
You want to just be careful you don't put
too much there and end up with this big
pile of money you can't use for health
and have to use it for something else.
And then you get a 25% penalty.
(14:57):
Kind of ridiculous. So now that you know
this buckets, which you might have
already known, but breath fresher. You
want to think about how to balance these
options based on your current tax
bracket. Like we said, most tax pros are
going to focus on saving you taxes this
year and put as much as possible into
that tax later bucket. But be sure you
(15:17):
have an honest conversation about your
beliefs about the future of taxes. No one
has a crystal ball, no one really knows.
But your opinion matters, right?And you
want to feel good about the decisions
you're making. So make a plan to reduce
taxes over your lifetime and for your
heirs, your beneficiaries, rather than
being shortsightedly focused one year at
(15:37):
a time. So let's talk about
why having multiple tax treatments gives
you more flexibility later on in life
in quote UN quote retirement or financial
freedom. Most people believe their income
in retirement is going to be lower, but
considering the following for you, our
small business owner. the tax deductions
you might lose, all those business
(15:58):
expenses that you currently deduct, or
the children who are your favorite tax
deductions, you might not have those in
30 years, particularly you might have to
pay your own cell phone bill, and that's
a personal expense at that point, all
those kind of things. Well, and then
also, again, if we're in retirement,
as we are aging, one of us, if we're
(16:19):
married, is going toMaybe
retire to heaven. And then that increases
taxes too, because you're now single.
Yeah, single tax brackets are way higher
than married tax brackets. Absolutely.
Also consider the retirement lifestyle
you want. Do you want to have a lower
income in retirement or do you want a
much higher one and continue to have that
growth mindset?Yep, especially with
(16:40):
inflation. And then also remember there
can be changes to the tax law and you
might lose some benefits like the QBID
that we discussed earlier, as we have
learned a lot that taxes can be changed
and things can be different in the
future. And so we want to plan now, but
also be prepared for the future.
But also know again, who knows what's
(17:01):
going to happen. Again, the tax code is
bigger than the Bible. It wasn't always
that way. There's always been added and
changed over time. Yeah. So the if you
have these three different buckets, those
different tax treatments let you control
more what your taxable income is going to
be. No matter how Congress changes the
tax code, a tax rates go up, you can pull
(17:23):
more from tax-free accounts. If they
go down, you can use your pre-tax money.
If there's a high standard deduction, you
can take that from your pre-tax money.
All kinds of fun things like that, having
money in these different buckets. Also
can help you manage things like required
minimum distributions, have more
flexibility with your Social Security
benefits, your Medicare premiums, if
(17:43):
those things exist at that point. And you
can just better control your tax bracket
by choosing which bucket you pull from
each year. So having options gives you
more control over the tax impact in your
heirs. And we're going to talk more about
this also in a future episode this month.
So be sure to subscribe so you don't miss
out. Yeah, I mean, I do want to say I was
just literally talking to a friend of
(18:04):
mine. Just now about his
dad who is in the 70s
and saying, oh wait, I made a lot of
money. I'm doing good. Now I need to
start thinking about this whole
RMD thing, taxes and and
planning on that. And he's like, I did
not realize all of these things. I did so
(18:25):
good of work and his his son is going to
inherit a blessing, maybe even a mess.
And so thinking about this before you're
seventy-two. Is really important. When
you're 40, when you're 20, start thinking
and building those foundations now.
And if you're like, no, I don't want to
do that, that sounds too complicated and
(18:46):
expensive and I've got more important
things to do. Stay tuned after the break.
Ready to take the next step towards
securing your financial future?Whether
you're planning for retirement, saving
for your dream home, or you just want to
(19:06):
make your money work harder for you, the
team at Wealth Wisdom Financial are ready
to assist you. And now it's easier than
ever to see how we might give you a boost
on your financial journey. Schedule a 15
minute discovery call with one of us
today and let's discuss your questions
and your financial goals together. Don't
wait any longer. Your financial freedom
(19:27):
awaits. Schedule your discovery call at
www.wealthwisdomfp.com/call.
OK, now we
know some of you are thinking. This
sounds complicated, expensive. Don't I
need a fancy accountant or a big budget
(19:48):
to do this stuff?Well, isn't this going
to eat up all my time that I need to be
putting in my business to grow my revenue
and keep things going?Actually, no.
Well, having a good tax professional is
important. Many of these strategies are
straightforward enough for any business
owner to understand and to implement.
So we want to clear up some confusion
(20:09):
that's out there. When you're making a
million dollars of gross revenue, you can
ignore some of those complex strategies
you might hear from bigger businesses.
For example, don't go chasing things
that are more of a worry of
international tax structures. Right.
You're probably don't need to worry about
that. If you have some real estate, you
(20:30):
might want to do some cost segregation
and pay the expense for that. But it the
tax savings might not actually be worth
it at your level. Complex trust
structures are typically overkill at this
level and you don't need to stress about
the corporate minimum tax. That's only
for companies making over a billion or
so. I think somewhere on there.
Definitely don't need to worry about
that. I mean, again, I see this a lot
(20:52):
where people are trying to figure this
out, and I'm like, dude, you need to what
you need to do is make money and
have a problem. Well, yeah, okay, so make
money, yes. But here's the bottom line.
Make money, but you also want to make
money as you focus on the fundamentals of
accounting first, right?Clean
books, proper documentation,
(21:12):
understanding basic deductions. Will get
you much further than chasing all these
complicated strategies meant for larger
businesses. These fundamentals are
likely to make your business more
profitable too, right?You're able to see
what's actually making money, what's
losing money, and trim the fat and build
a lean business and have more revenue
with the right products that actually
(21:33):
make more profits because you've got
clean books and proper documentation and
you know the deductions that you can get.
I think that's the thing. It's clean and,
uh, understandable, right?For you, right?
If you're trying to have all these
little, um, loopholes or,
or things that, uh, oftentimes we're
paying for the complexity and we're not
(21:55):
really receiving the results, whoever's
selling us on the other tools
that can save us, we, we realize, oh, we
saved taxes, but then we paid a
lot. I mean, I mean, think about it even
then. paying a tax
person to figure out how to avoid paying
taxes. It's kind of an interesting thing.
(22:16):
And also, a lot of these same things,
clean books, proper documentation, this
is also going to help your business be
more sellable or investable over time,
which might be worth way more than
whatever tax savings that you're chasing
after and trying to get. So remember,
tax planning isn't just about paying
taxes or paying little less taxes.
(22:37):
Is about understanding how to work within
the system to grow your business
efficiently. The strategies we talked
about today aren't loopholes, they're
intentional benefits that's put right
there in the Internal Revenue Code to
help businesses like yours succeed. So
use them. And if you wanna dig into this
more, be sure you hit that subscribe
button cause we've got some really
(22:57):
awesome episodes planned this month about
how to avoid getting on the wrong side of
the Internal Revenue Service and getting
audited and having to pay a, you know,
$20,000 of back taxes and fines and
penalties and everything we're gonna talk
about. Planning for a sell of your
business and how you can set up so that
you don't end up paying a whole bunch of
taxes. And when you sell your business or
(23:18):
your children don't end up paying taxes
and they inherit your business or you end
up retiring and living off the business,
still owning the business but not running
the day-to-day. We're going to talk about
how you save taxes at that point and so
much more. So hit the subscribe button
and don't miss an episode. And we got one
more goody for you. If you want to take
action on what you've learned today, head
(23:39):
over to Wealth Wisdom Financial Community
for your free small business tax
strategy checklist. Again, we said a lot
there. So having this little checklist
may help you. I mean, seriously, you got
to run a business. There's so much more
besides all that number stuff and tax
stuff. You didn't get in to do all of
that. You got in to sell the widget,
(24:00):
right?Um, so go download
Small Business Tax Strategies Checklist
at our community. It breaks down
everything we covered in today's episode
and simple, actionable steps that you
can start implementing right away. Plus,
it includes a bonus section on
record keeping templates that will make
(24:22):
your life much easier when tax time
rolls around 'cause, you know, having
simplicity and clarity. Um, I know your
tax guys will love that too. Yeah, maybe
save you some money too. Thanks for
joining us. Again, hit that subscribe
button and we hope you live long and
profit. The topics presented in this
podcast are for general information only
(24:42):
and not for the purposes of providing
legal, accounting, or investment advice.
On such matters, please consult a
professional who knows your specific
situation.
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