EP 17: The Hidden Maze of Small Business Taxation: Insight and Advice

Ready to unmask the unnerving world of small business taxation?

This episode of the Common Sense Millionaire is a treasure trove of insights, revealing potential pitfalls and how  I learned to sidestep them. Let's pull back the curtain on everything from the consequences of unreported cash transactions to the importance of a reliable tax preparer in navigating the labyrinth of deductions and expenses. 

Hear how not reporting your income can dramatically shrink your Social Security payout in retirement and how the IRS leverages technology to track improper deductions.

In the second half, I'm presenting a blueprint for handling your tax returns with confidence and integrity. High-income earners, gear up for some invaluable advice on engaging a tax professional to minimize your tax burden. There's a few red flags that trigger IRS curiosity, such as dubious home office deductions and ostentatious business expenses, and we'll discuss those too. Plus, we're delving into the murky depths of overseas bank accounts and the dangers of evading self-employment income.

We are about to journey through the labyrinth of taxation, filled with must-know tips and advice!

Thank you for listening to The Millionaire Mindset Podcast with George Dines.

To connect with George visit www.georgedines.com

To Schedule a call with George visit: https://georgedines.com/contact/

Episode Transcript

Speaker 1 (00:02):
Welcome to the Common Sense Millionaire, where we
work to promote your financialadvancement in knowledge process
and education so that you andyour family become financially
secure.
This is the place I shareCommon Sense Action Steps that
you can take today to assistyour financial advancement.
So sit back, grab a drink andlet's get started.

(00:23):
Common Sense Millionaire here.
The session today is going tobe kind of interesting and I
think it's probably one of themost important aspects of a
small business.
Okay, what are some of the taxconsequences of having that

(00:47):
business?
So I bring this up because alot of people are really
ingrained in wanting to start abusiness, of course for the
benefit of themselves and ortheir families, and to provide a
brighter future financially foreveryone in the family, also

(01:07):
for the employees that are hiredor the consultants that are
paid.
All of that.
There's a chain there.
It's like the chain of life.
It's the chain of financiallife that creates money for
people and especially for Blackfolks.
But what are some of theconsequences?
What happens?

(01:30):
Well, what happens is a lot oftimes people make things up for
their filings or they're notfollowing the IRS policies and
procedures, and that's a bigproblem.
What are some of the thingshere that raise concerns.
I have been to numerouscommunity events where I talk

(01:54):
about the importance of taxplanning and importance of
getting a very strong taxpreparer to work through some of
the issues that may come up inthe business.
Biggest problem I have well,actually, there are two big
problems I have when I thinkabout them.
That really piss me off.
The first one is cashtransactions.
So people just exchange cashand don't record the

(02:17):
transactions, but they will cometo you with information that
show that they lost asignificant amount of money.
Now they sold an item, so therewas a cost to that item.
So they're showing that thereis a loss with items that were
sold, because they're taking thededuction for the purchase of

(02:38):
the inventory and you're likewell, wait a sec, how did you
lose $20,000?
Okay, it doesn't make sense.
So that has to mean that thereare cash transactions taking
place that aren't on the books.
Now, if I, who do not own thatbusiness, can computate that
number, well, what's the IRSgoing to do?

(03:01):
Well, what is the state goingto do?
This is one of the key itemsthat the IRS looks at.
They're looking at largedeductions or excessive losses.
So it just doesn't make senseif you can afford to buy all of
that inventory and whatever theproduct is, but you have no

(03:21):
income.
That makes no sense.
That's a cash transaction, okay.
And what's the?
How do you explain this?
The end of the chain on thatokay, is that at the end of the
year, you're not probably makingenough money to pay for

(03:43):
self-employment tax.
Okay, I'm going to give you avery, very bad self-employment
tax story.
Individual that I know workedfor cash, just cash.
Never declared the cash, neverfiled that with taxes.
They just cashed.

(04:03):
They took cash and accepted itfor over 20 years in a
particular profession, and theprofession dearly did not
require any extremecertification or any special
classes or anything like that.
It was a good business, but itwas all done in cash.
So none of it was reported,none of it.
So now what happened is thisindividual is now much older

(04:29):
than 65, decides they want toretire.
They figured out that theamount of money that they were
going to get from SocialSecurity because that person
never funded a pension plan atall the maximum that they could
get from Social Security was$1,400 a month.
Now I want anybody who'slistening to this.

(04:50):
I want you to explain to methat you can send an email or
something you can tell me.
I'm crazy.
How are you going to live on$1,400 a month If you've got to
pay for housing, you've got topay for gasoline, you've got to
pay for food, you've got copaysfor medical care, and that's
because working with cashtransactions and spending the

(05:14):
cash, but now you don't work andyou're only going to get $1,400
a month from the federalgovernment through Social
Security.
I think that's a problem.
I have been laughed at when Italk to people about this at
events and they're like oh no, Idon't pay no taxes.
I don't pay no taxes, butthey're driving a huge car.

(05:37):
It is a very nice car.
Eventually, this cannotcontinue going forward.
The IRS is really really closingin on business activity because
they see that's where a lot ofimproper deductions are
occurring and that thegovernment is losing money by

(06:00):
not properly monitoring what'sgoing on with small business.
In the olden days I was toldthat for the IRS to analyze
anything on a return, theircomputers had to be custom
programmed in order to get itdone and it would take days or
maybe even weeks for theprogramming to occur before they
could run it, and they couldonly run one sequence of that at

(06:24):
a time.
Now they have a special unit atthe IRS.
It's the small business,self-employed, and I had a
meeting with them.
I was attending a meeting andthey were speaking and it scared
the you know what out of mewhen they were talking about how
now they are getting to thestage where, if they find
something that looks interesting, they have almost unlimited

(06:48):
ability to test everything outthere to find the other tax
returns that are mirroring whatthey're seeing as suspicious.
So that means eventually, allof the little funny things that
everybody is doing with this,they're all going to be coming
together in one great list andthey're going to pick who

(07:10):
they're going to audit to seewhat's going to happen.
So this is very important.
So another thing that the IRSis looking for are weird home
office deductions.
Okay, if you're not sure whatyou're doing, again get a
professional, because they'relooking for that and that's a

(07:31):
really big red flag for abuse ofthe deduction, excess or lavish
business expenses Okay.
So if you're spending $4,000for a client meeting, that's
going to raise a red flag, okay.
Right now it's very difficultfor them to look at that, but

(07:51):
within the next four to fiveyears.
It's going to be routine asthey're running and running
analytical analysis oneverything to come up with
what's reasonable, what appearsnot unreasonable.
We need to flag thoseparticular returns.
Another big, big problem, and Irecently had this situation

(08:12):
where clients, family had jointbank accounts in another country
.
They forgot to actually reportthat and it was a pure accident.
They didn't mention it to me, Ididn't know.
Typically, when I have a clientthat's from another country, I

(08:32):
make sure to ask these questionsbecause a lot of times people
from other countries they maymaintain a bank account in the
country they're from for thebenefit of their family there.
Okay, there's no problem withthat, it just has to be reported
properly.
Such charitable deductionswithout documentation, that's

(08:54):
not going to work anymore.
As a matter of fact, I have alot of people who've spoken to
me about charitable deductionswhere they take clothes or other
kind of like kitchen pans andpots and all that to a place and
they get this receipt wherethey say thank you for your
donation.
Now, it doesn't say on thatreceipt how much it's worth,

(09:17):
because they don't want to getin trouble for saying that.
And so when I'm faced with aclient who's got this same slip
and say, well, it's worth $600,.
I don't do those anymore, Irefuse.
I say, okay, I will do this,but I need to know how much you
paid for it.
What was the date you paid forit.
I need you to appreciate it toits current value and that's the

(09:38):
amount that you're going to getto deduct.
At that point nobody wants totalk to me.
But I don't do those anymore.
Please don't do those,especially with a business
account.
If it's not right, don't do it.
The biggie self-employmentincome.
People are doing everything tododge self-employment income

(09:59):
because, hey, right, they mayhave a regular job where they're
paying self-employment incomefor that job, and then they have
a profit in their smallbusiness and they're going to
have to pay self-employment.
So they're doing crazy thingsto escape that.
Okay, there's another way to doit.
One is to look at your entitystructure and go into an entity
that does not require you totake self-employment tax, as

(10:25):
long as you pay a reasonablesalary to the owner of the
business.
If you've been audited before,you can expect that you're
flagged.
There's no question about it,especially if you've done
something really kind of off theshelf, and that's why I always
ask for copies of returns priorto working with a client, and if

(10:50):
I do see something funny, I'llhave them go to their IRS
account and download informationfrom there in terms of they'll
give you the IRS, will give youan income report that shows all
of the money that you earnedthat was reported to the IRS.
Sometimes you have to look atthose things to make sure that

(11:10):
you're moving in the rightdirection.
And I would say finally, well,the last two items extremely
important.
The first is you cannot makemistakes.
If you make mistakes and errorson the return, you will be
flagged.
You're going to get a nastyletter and they're going to
adjust your return and ifthere's any additional taxes due

(11:30):
, they're going to charge youinterest for that.
You don't want to do that.
The second is high income taxearners.
High income tax earners areimmediately flagged.
That's why it's very importantthat if your business is, say,
structured as an LLC simply isthat, but you're making
significant income you need totalk to your tax professional or

(11:52):
your CPA or accountant orwhatever to see if there are any
options for you with yourstructure where you can minimize
some of the results of the highincome levels.
And I think the last thing iscalled kind of integrity.
I like to think that I have ahigh level of integrity.

(12:13):
I turn people down who do nothave high levels of integrity,
and it's very important that youhave that integrity to want to
do this right, because it's notjust about you, it's about your
family, it's about your friendsand about your professional
reputation.
You don't want that to go downthe tube because you tried to

(12:36):
mess with your business taxreturn or you gave the wrong
information to your tax preparer.
Just remember, once you signthat return, that return belongs
to you.