May 13, 2025 • 35 mins
Every dollar you save in taxes is another dollar you can reinvest in your franchise. But are you leaving money on the table? In this eye-opening conversation, CPA Michael Reeder reveals the tax strategies that have helped franchisees nationwide maximize their profits and build sustainable wealth.
Michael brings 14+ years of specialized franchise accounting experience to the table, explaining how the right approach to entity structure, vehicle acquisitions, and compensation can dramatically reduce your tax burden. His "three bucket methodology" cuts through the confusion of LLCs, S-Corps, and C-Corps to help you make decisions based on your unique financial situation rather than one-size-fits-all advice.
The discussion breaks down practical strategies that could save you thousands, including how to properly handle vehicle purchases (hint: "purchase and heavily finance" rather than lease), the potential restoration of 100% bonus depreciation, and how S-Corp owners can save approximately $17,000 in self-employment taxes on $200,000 of business income through strategic salary allocation.
What makes this conversation particularly valuable is Michael's ability to translate complex tax concepts into actionable insights. He addresses common misconceptions about franchise fees (which must be amortized over 15 years) and explains how to capture tax benefits even when selling your business before the amortization period ends.
Whether you're considering franchise ownership or already running your business, this episode provides the financial clarity needed to make informed decisions that align with both your short-term cash flow needs and long-term wealth building goals. Connect with Michael at readercpagroup.com to learn how specialized tax planning can transform your franchise's financial picture.
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Episode Transcript
Available transcripts are automatically generated. Complete accuracy is not guaranteed.
Speaker 1 (00:01):
Hi everyone, Welcome back to the we Bought a
Franchise podcast.
I'm Jack Johnson.
I'm Jill.
Johnson and we're here today.
You guys, we have got such anexciting guest for you today and
for those of us.
Did you ever think growing upwe'd say this about talking
numbers and accounting?
Speaker 2 (00:15):
Maybe you did, I definitely did.
Speaker 1 (00:17):
Not until I became a business owner.
But I'm going to tell you guys,we have a financial powerhouse
with us on the podcast today.
His name is Michael Reeder.
He owns a firm called Reeder.
Is it Reeder?
Financial CPA?
Speaker 3 (00:30):
Help me out here, yeah, reeder CPA Group.
Speaker 1 (00:33):
Reeder CPA Group, and what's exciting about this, you
guys, is that he focuses onhelping franchisees keep more
money in their pocket.
Michael, let's get into it here.
There's so many things I wantto talk to you about, I don't
even know where to begin, buthere's where I think we can, and
I want you to tell the folkswho you are and what you do.
But this is just an example.
So I was having a chat with myfriend, chat GPT, yesterday.
Speaker 3 (01:01):
I call him chatty.
I call him chatty, I love it.
Speaker 1 (01:05):
Okay, so, uh, we acquired a new vehicle this year
that we use for business.
It's not one of our pinkstrucks, it's a.
It's a, it's a uh, it's an SUVthat we use to go to client
meetings and things like that.
I would say that over 50% ofits use is is for our company.
Um, so chatPT and I weretalking about all the ways that
(01:26):
we might be able to use that tohelp knock down some of our tax
burden.
I also asked ChatGPT and thisis where I'm going to bring you
in hey, there's a 20-year-oldcar that I'm looking at that I
like.
Can I also write that off if Iuse it for business?
So, Michael, why don't we usethis as a point to come in here
and tell the folks how leasingcompany vehicles, whether they
(01:46):
be vans, like we have for PINX,or even just a personal car that
we use for business, can helpus knock down some of our tax
burden?
Speaker 3 (01:54):
Yeah, absolutely.
This is one of the most commonquestions that I get as a CPA
that works with a lot of smallbusiness owners how to approach
writing off the vehicle, how toapproach automobile expenses.
And this is one of the subjectmatters where you could talk to
10 different CPAs and get 10different answers.
(02:14):
And so I like to approach how Iwas raised.
I'm from Chicago, I cut myteeth in this industry, learning
from some creative, strategicCPAs from Chicago, and so I like
to approach write-offs from theangle of not hey, can I deduct
this, yes or no, but how do Ideduct this?
And so, at the end of the day,the tax code is written for the
(02:35):
self-employed, and so if youhave vehicles and you're using
them in the context of yourbusiness, then how can we write
them off?
And for the two of you, youhave your franchise consulting
business and your pinks windowcleaning business, so you have
multiple businesses, right, andso you know.
So I'm a big.
So my default when it comes toauto my, my default is I'm a big
(02:59):
fan of purchase and heavilyfinance.
Now there are times whenleasing may make sense.
But I'm a big fan of purchaseand heavily finance.
Now there are times whenleasing may make sense.
But I'm a big fan of purchasingand heavily financing for the
following four reasons, right.
So I always start out with mydefault and then if I go to you
know, if the lease terms are,like you know, crazy good, then
okay, but purchase and heavilyfinance.
For one, because you purchaseit by owning the asset, you get
(03:21):
to benefit from the depreciationexpense.
Right, section 179 or bonusdepreciation.
You get to benefit from thedepreciation expense because you
own the asset, as opposed toleasing it.
But heavily finance it becauseI'm a big fan of strategic use
of good debt, and so I am verycomfortable with a leverage
strategy.
When it comes to growing mybusiness, we do it for real
(03:42):
estate, why not do it for ourbusiness?
And so when it comes topurchasing, heavily financed,
heavily financed then that way Ican get all of that
depreciation with zero or veryminimal down.
So then that way I can preservemy liquidity for other working
capital purposes.
Speaker 1 (03:57):
That's what I thought you meant.
So let me see if I'munderstanding this, because this
is exactly what we did.
So let me see if I'munderstanding this, because this
is exactly what we did.
We paid nothing down on thatvehicle and we absolutely we
financed it, we own it, wedidn't lease it, but we put
nothing down because we ran thenumbers and it was like the
monthly it's minuscule.
If you put five grand down, itdoes nothing.
(04:19):
And I've seen franchisees,michael, make this mistake where
the SBA told them go buy threevans outright, take 150 grand of
your working capital and put itinto vans.
You don't even have jobs.
For I'm like no, no, no, no,never do that.
So it sounds like we're on thesame page.
Speaker 3 (04:36):
We're definitely on the same page.
So take full advantage of thedepreciation write-off while
preserving your liquidity forother working capital purposes.
And then it's a loan.
So the interest on the loan youcan write the interest off as
well as a business expense, andso that's reason number three.
And then reason number four isyou have an asset that has
trade-in value for down the road, when you need to trade it in
(04:57):
for the new vehicle.
So my default for those fourreasons I have a blog post on it
on my website purchase andheavily finance for those
reasons.
Speaker 1 (05:15):
Michael, what's your website?
ReadercpagroupcomR-E-E-D-E-R-C-P-A groupcom.
Okay, that's awesome.
And so ChatGPT told me that Icould capture, and this is where
I need like a real person totell me that, let's say, the car
costs 50 grand, that I couldwrite off that entire amount in
year one.
Is chat GPT wrong?
Speaker 3 (05:30):
So there's when there are nuances, right.
So is it bonus depreciation oris it section 179 depreciation?
Is it an SUV or is it a heavyduty truck?
What's the weight?
You know there's lots ofzigging and zagging that can go
into all of it.
And so ChatGBT always says theyalways preface the tax advice
questions in it with you shouldtalk to a tax advisor and all
(05:50):
that type of stuff, just becausethere are lots of different
except, yes, but in thissituation, et cetera, et cetera.
And so I would say, for themost part again getting back to
what I was saying we will alwaysfind a way to maximize the
write-off and if there's anylimitation, if you're not able
(06:11):
to write off the entire amount,then you're going to be able to
write off the majority of theamount and then the remaining
undepreciated amount in year onewill be written off in years
two through five, but it's still, whether it's all of the 50k or
it's the majority of it, it'sstill a massive amount.
And then that brings up whatwe're all kind of keeping our
finger on the pulse right now,waiting on is what's going to
(06:32):
happen with tax reform, becausethis is like it's like the
difference between bonusdepreciation and section 179
depreciation is really importantto understand.
Section 179 depreciation allowsyou to write off the entire
amount of the fixed asset, ofthe qualifying fixed asset, in
the year of incurrence.
There's some limitations withthe vehicles but it's only to
(06:53):
the extent of profit or otherself-employed non-passive income
on your tax return.
So if you have a profit of$100,000 and you purchase a
qualifying fixed asset for$70,000, then you can write it
off the full $70,000 in year one.
But if you have a $20,000profit or you're at a loss
(07:17):
already before the depreciation,then the Section 179, you can't
write it all off because it'sonly to the extent of profit and
you either have a $20,000profit or you're already at a
break even or negative beforetaking depreciation.
But if you have anotherbusiness that flows through to
your personal tax return andthat one's profitable, then the
section 179 can offset that.
But if you don't, then itcarries forward.
Speaker 1 (07:39):
Let me ask it another way.
Michael, you've got me soexcited I got to jump in time.
Yeah, michael, you've got me soexcited I got to jump in.
Yep, let's say that I'm a firstyear franchisee and I didn't
yet I'm not profitable, right?
And so I don't necessarily needthat big write off this year.
I can amortize it over thecourse of a few years, right?
So if I don't want to take thefull thing this year, I don't
have to.
Speaker 3 (08:00):
You don't have to Correct and so.
But then there's anotherimportant type of accelerated
depreciation called bonusdepreciation.
Now, bonus depreciation is notSection 179.
And here's, and so, as I'm surethe two of you know, maybe the
maybe some people in theaudience do and some don't Bonus
depreciation has been gettingphased out over the last few
(08:21):
years.
So, bonus depreciation you usedto be able to write off 100% of
the qualifying fixed asset inthe year of purchase, regardless
of where your bottom line isbefore the write off, right.
So it's like if you're alreadyat a break even or a loss and
you just have your one startupbusiness and you have no other
self employed business, it'sjust your one startup business
(08:42):
and it's at a loss, then thebonus appreciation would further
the loss, right and so.
But it's been getting phasedout.
It was, you know, in 2023, itwas 80%, 24, it was 60%.
Now in 25, it's 40%.
But the rumblings are, you knowCongress and you know, president
are going to, you know, as partof the big, beautiful bill that
we're all waiting on, you know,with tax legislation, they're
(09:05):
going to bring bonus back to100%, which would be amazing.
All the more reasons to youknow, like another reason the
tax code is written for theself-employed.
The Tax Cuts and Jobs Act backin 2017, 2018, was pro small
business, primarily with thequalified business income 20%
deduction and but now with this,if bonus comes back to 100,
(09:28):
it's going to be huge becauseyou have a startup business
right and you can't reallyqualify for section 179 because
you're already at a loss.
It's expected that a startupbusiness is going to be at a tax
loss, but bonus coming back to100% is going to be huge and so
hopefully that happens effective2025.
Speaker 1 (09:46):
That big, beautiful bill.
Speaker 2 (09:48):
Okay, I gotta pop in here because, like this feels
like a foreign language to meand I'm so, michael, can you
tell us, like obviously, yourwealth of knowledge?
Can you tell us a little aboutyour background and what you do,
because I know we kind ofjumped right into the exciting?
stuff but clearly you know whatyou're talking about.
So, um, can you tell everyonesort of you know how you got to
(10:09):
this place, to know everythingand your background and what
you're doing now?
Um, cause it's very impressiveto me as someone that really
feels like you guys are speakinga foreign language.
Speaker 1 (10:18):
And before he goes there one sec, I have to just
tell you what set us off, holdon before and she's is that I
saw this.
We're working with a client andMichael sent her this email how
she should structure hercorporation in like two
different ways.
Like she's in one state, butthen we're going to have an S
over here and we're going tohave this over in this state and
I'm like Holy smokes, thisguy's so smart, this is
(10:39):
brilliant.
So, michael, with that, yes,please tell us about you.
Speaker 3 (10:44):
Absolutely, absolutely so, jill and Jack and
the audience.
So I'm 38 years old.
I own the firm now that hiredme out of college.
I've been in public practice asa CPA for about 14 and a half
years.
I'm originally from Chicago.
We still have an office in theChicago suburbs.
I've been living in thePortland Maine area as my
(11:10):
primary residence for the lasttwo and a half years with my
family.
We have a couple offices inPortland as well, and we're a
virtual national CPA firm withclients all across the country
and team members all across thecountry.
Our team is all stateside, nooffshore, and over the last 11
years I've developed a nicheworking with franchisee
businesses.
It's a fun story when I was theminority partner of the firm
(11:31):
that I now own outright back in2014, we acquired a small book
of business in the Chicagosuburbs and we merged it into
our practice.
It was only like $150,000 bookof business, but one of the
clients in that book of businesswas a franchise consultant and
he's retired today, but Iconsider him one of my mentors.
(11:52):
He was in franchising for over50 years, either on the XOR side
, the Z side, or as a consultant, and so I'm doing his taxes,
and it's 2015 at the time andI'm doing his taxes for 2014.
And I'm like, hey, and so hehas an S corp for his franchise
consultancy and I've never heardof him.
What's a franchise consultant?
And so he tells me what he doesand how he makes money and I
(12:15):
thought it was reallyinteresting and I'm just like,
hey, you know, just, I'm herefor your candidates.
You know, as you're workingwith your candidates and they
have any questions about entitystructure strategy, funding
strategy, tax strategy for smallbusiness ownership, I'll talk
to them for free and and and.
So you know, know, and I'lldive into these topics.
(12:35):
And so he took me up on on myoffer.
He sent me a few candidates uh,it was, you know, it proved
constant, that value wasprovided.
And then, you know, then thoseand I told this candidate like
hey, like you know, if you wantto work with me moving forward,
you know we can always have thatconversation.
So the candidate got valuebecause they got, you know,
valuable advice during thiscrucial phase.
You know, looking to buy abusiness, um, uh, the consultant
got value because I got, youknow that, valuable advice
during this crucial phase.
You know, looking to buy abusiness.
(12:55):
The consultant got valuebecause I got, you know, that
consultation got the candidatethat much more fired up and
clarity provided on entitystructure, funding, tax, blah,
blah, blah than they had before.
Right, thus increasing the youknow, making it that you know,
reducing any sort of wet andcold feet or whatever when it
comes to signing the franchiseagreement.
Right, commission gets paid toconsultant.
(13:19):
And then it's a win for mebecause I get to get in front of
a client who I have potentialof a prospect you know to.
You know I have the potentialto get a lifetime client, year
over year over year, and soproved concept with that.
Did that a few times with someof his candidates and then I was
like, hmm, okay, now let mejust go hit the LinkedIn circuit
and just start finding otherfranchise consultants.
And so I'm essentially doingthe same thing today, at a
(13:41):
bigger scale that as I was backthen.
So I have a nationwide networkof franchise consultants.
I am, I am a vendor, cpa memberof France, serve as well, as you
know, some of the otherfranchise referral networks, and
so I've built up a nationwidenetwork of franchise consultants
over the last 11 years and overthe last few years now there's
(14:03):
franchisors that are starting tosee the value and so I'm
leaning more into the franchisorside as well.
And so it's so much fun.
I work with a ton of militaryvets.
I work with a lot of corporaterefugees.
I'm not the franchiseconsultant right, jack and Jill
are the franchise consultantsbut when it comes to hey, entity
structure strategy, fundingstrategy, diving into that stuff
(14:26):
, what my process has proven isit's a better hey talk to reader
about this stuff is a betteralternative than go talk to a
reader about this stuff is abetter alternative than go talk
to your CPA.
Because, one, a lot of peopledon't have a CPA.
And, number two, people that dohave a CPA, they're just a tax
prepared.
They just prepare taxes like apersonal tax return.
They don't really dive intostrategy.
(14:46):
They have no idea what the RobC Corporation is and all the
nuances that go into the Rob CCorporation.
They don't approach entitystructure and funding strategy
from the angle of strategic taxplanning.
So my industry like to bring itin for a landing.
My industry is very deadlineheavy, right, there's busy
season, there's not.
You know, we just got throughApril 15th, so you know, and so
but what I'm doing 12 months outof the year, regardless of
(15:09):
deadline or not.
Deadline is I'm talking toprospective franchise buyers,
diving into everything thatwe're talking about right now.
Speaker 1 (15:16):
I mean, it's such a valuable service and to have
someone as knowledgeable as you,especially when it comes to
franchising, is key.
So, Michael, let's get intothis.
S-corp versus C-Corp versus LLCversus LLC taxed as an S.
Speaker 3 (15:36):
Yeah.
So I've developed what I liketo call my three bucket approach
, my three bucket methodology,to entity structure and funding
strategy, coming at it from theAnglo strategic tax planning.
I know that's a mouthful and Ihave to figure out how to
tighten that up, but essentiallyover the last 11 years I've
developed a process right whenI'm talking to a prospective
franchise buyer and they've gotquestions about entity structure
(15:59):
and funding.
Right and everything you justsaid, jack, right, llc, s Corp,
llc, texas and S Corp, just apure S Corp, rob C Corporation,
blah, blah, blah.
Before we even like, I can'tadvise anyone on any of that
stuff until I get context on thefollowing three things right,
the following three bucketsBucket one what's the investment
level, initial plus the first12 months?
I want to know the initial plusthe first 12 months.
(16:20):
I know that item seven isreally just initial, but initial
plus the first 12 months, allin ballpark total of that amount
, how much is the franchise fee?
I like to know the franchisefee because I have to explain to
them how the franchise fee getstreated for tax purposes.
But investment level number one.
Bucket two what's theallocation of assets on the
personal financial statement?
I'm looking for cash, otherliquidity, retirement and real
(16:43):
estate.
And then bucket three what'sthe household income situation
looking like?
Once I have all those threethings on a piece of paper and I
always take my own notes and Igot the AI always listening tax
as a partnership, to start withan sba loan, um, and then, once
all of the losses are are usedup for tax.
(17:22):
But you know, in year three,take that llc and elected for s
corp, because now we can savemoney in social security,
medicare taxes, because it'sprofitable, right, like and I
like.
So you know, once I get contexton those three buckets, I might
talk to candidate one right, go, llc partnership with an SBA
loan, and here's why, right.
And then I might go Rob Ccorporation for candidate.
I might advise, you know,candidate number two to go Rob C
(17:46):
corporation, and here's why.
The why is always going to bebehind what I'm advising.
And so there is no, you know.
You know there is no.
Like painting everything withone broad brushstroke.
You know, like it's all, likeeveryone has their own unique
set of circumstances, likeeveryone's answers to their
three buckets respectively andhow they're all attached at the
(18:07):
hip.
That's unique for candidate A,it's unique for candidate B and
candidate C.
And so that's why Rob Secordmight make sense so much sense
for some person, but not foranother.
And it's based off those threebuckets.
And then you have toacknowledge the human aspect of
it, right?
I personally am very comfortablewith what I like to refer to as
(18:29):
strategic use of good debt andalso using other people's money
instead of my own, preserving mynest egg other people in the
context of bank and SBA, andalso I'm a big fan of leveraging
my nest egg assets beforeliquidating them.
For me, I'm very comfortablewith that stuff, and so are lots
of entrepreneurs.
There are some people that arejust maybe it was like a
(18:50):
traumatic they witnessed theirparents file, get know, like you
know for get their houseforeclosed on or whatever it is.
But some people just hate, hate, the D word, right, they hate
debt, they hate debt.
And so I might talk to someone,and for reasons x, y or z,
based off of what they put ontheir three, but you know what,
you know assets, income,investment I would say, oh my
(19:10):
God, llc, texas and SBA loan I'msorry, texas and S Corp with an
SBA, blah, blah, blah.
It makes so much sense for you,candidate A, I just don't want
to take on debt.
I'd rather put my cash at riskor my retirement rollover.
It's like, okay, but at leastthey know, at least they.
(19:32):
You don't have to agree with mewhen I advise you, but, like um
, most people tend to becausethey, they learn a lot of things
.
But every now and then someonewill be like mike, I hear you
and I appreciate all of it, butI'm still gonna go this route
because I just I don't want totake on debt and that's fine,
but what's gonna no matter whatthey're gonna get an education,
no matter what it's a personaldecision and I get that.
Speaker 1 (19:50):
I mean I'm inclined as a sort of long time
entrepreneur grow up withentrepreneur both Jill and I did
.
There's different seasons ofdebt.
You know there are seasons ofyour business where you're going
to bring in a lot of cash andyou can knock out that debt in
two seconds.
If you have the opportunity,like so many people did a few
years ago to get an SBA loan forlike a 1% rate, you get it.
(20:13):
Just like with the mortgages afew years ago.
If you could refinance to 1%,you take it, you grab it.
Now, all of a sudden, your homehas become a massive part of
your retirement strategy and youcan leverage that.
Now you can take a home equityline of credit that you might've
never been able to get beforebecause your house is increased
in value so much.
So you're right and I agreewith what you're saying, um, a
(20:39):
hundred percent.
Let's give the folks somethingthat that they can take away.
Here let's talk about cause.
I think there's a lot ofconfusion when it comes to
paying a franchise fee.
I think most people, when theystart this journey, are under
the impression that they canwrite that off.
And it's not.
You can't.
You can, yes, but on all deferto the expert.
It has to be amortized overtime.
So, michael, two questions.
Let's talk about the totalamortization structure of how we
(21:01):
do that with a franchise fee,and also throw in what if we
sell our business.
Let's say our average franchiseagreement is 10 years right,
because that's going todetermine the amortization
schedule.
But let's also talk about aboutI sell my business in year six,
then what happens to thatamortization?
Maybe tell us about that?
Speaker 3 (21:19):
Yeah, absolutely so.
A franchise fee is what's knownas a section 197 intangible
asset.
So what that means in Englishis it's an asset, so you can't
write it off in full in the yearof incurrence like you can
other expenses like training,marketing, labor etc.
And it also doesn't qualify forthe Section 179 depreciation
(21:43):
and bonus depreciation likevehicle furniture, fixtures,
build out, blah, blah, blah.
It's a Section 197 intangibleasset, which means that you have
to capitalize it as an assetand for income tax purposes you
have to amortize it over 15years, even if the life of the
territory is only 10 years.
Now maybe your bookkeeper willdo book amortization you know
(22:05):
like, for amortization for bookpurposes might be 10 years, but
amortization for income taxpurposes is 15 years.
Be 10 years, but amortizationfor income tax purposes is 15
years, even if the life of theterm is of the franchise
agreement is less than 15 years.
And so you will get the taxbenefit of the of the franchise
fee through amortization over anextended period of time.
And then if you sell thebusiness in year seven, right,
(22:28):
and you have an asset sale, thenthe unamortized amount of the
franchise fee at the time ofsale is going to count towards
your cost basis in the assetsthat get sold, thus decreasing
your capital gain or increasingyour capital loss, depending on
the situation when you sell.
But you're going to get the taxbenefit of the unamortized
(22:53):
amount at time of sale.
Speaker 1 (22:57):
So you can claim the whole.
If you sold even in, let's say,year four and you've still got
11 years left on an amortizationschedule but you sell, you then
can capture the rest of thatdepreciation in the year you
sell.
Correct, exactly, perfect.
You see, these are things it's.
It's interesting there's allthese little nuances, Michael,
that people don't understand.
(23:18):
I mean, um, when it comes tothe ability to keep more money
in your pocket, like another onethat we get is, is people
wanting to understand if theyhave an S corp, if they can draw
, what type of salary they drawand how they can also live off
off they can use.
They can also pay themselvesthrough distributions.
Do you mind diving into that alittle bit?
Speaker 3 (23:38):
Yeah, absolutely, and I have a great fact sheet on
S-Corp shareholder, how you payyourself between salary and
distribution.
And so what I tell S-Corpowners, especially new ones, is
when people hear the word salary, they go back into like you
know, like salary is this thingthat you get once every two
weeks you get a check stub and,like all the taxes, you know
(24:00):
you're doing all the work.
Government gets paid first, youget paid last, and then so
people think salary.
Now that you're a businessowner, you have your own S-corp
or LLC taxes and S-corp or justpure escrow and you're the owner
and you have to um, you have topay yourself.
It's like no, throw all thatout the window, all of it out
(24:22):
the window.
So owner's salary for an S-corp?
It's just this thing that we doto readjust a portion of the
profit as owner's salary inorder to control, to mitigate
how much that you pay in SocialSecurity and Medicare taxes each
year.
So Social Security and Medicaretaxes for self-employed they're
(24:44):
what's known as self-employmenttaxes and self-employment tax if
your entity is taxed either asa sole proprietorship, like a
single-member LLC taxed as asole proprietorship, or a
multi-member LLC taxed as apartnership.
In those two taxclassifications right, sole
proprietorship and partnershipthat net business income is
subject to both income taxfederal and state, depending on
(25:05):
what state you're in and also15.3% self-employment tax,
that's the employee and theemployer portion of Social
Security and Medicare tax 15.3%the entire amount is subject to
self-employment tax if you're asole proper partnership
structure.
But if you elect S-Corp thenyou take a portion of that
profit and you reclassify it asowner's salary and you pay the
(25:28):
15.3% on the owner's salary onlyand the remaining S-corp profit
is still subject to income taxbut not subject to 15.3%.
There's different.
Again another classic ask 10different CPAs and 10 different
answers.
Speaker 1 (25:43):
Yeah, with the S-corp .
Let's say a company had a netof 200 grand and the owner draws
a salary of $60,000.
What percentage is the companytaxed on the profit so the
bracket of the profit, $200,000,or the owner's salary?
Is that owner paying tax onwhat he or she made in income or
(26:05):
is it on the profit of thecompany?
Speaker 3 (26:08):
Great question.
So the $200,000 in this context, everyone that Jack laid out
that $200,000 is going to flowthrough to the personal tax
return of the owner in twopieces there's going to be a
$60,000 W-2 from the S-Corp andthere's going to be a $140,000
K-1 from the S-Corp.
And so both of the 60 and the140, $60,000 W-2 and $140,000
(26:34):
K-1 still equals $200,000.
And it's going to go to thepersonal return and be subject
to income tax, depending on allthe different factors that are
on the personal return filingstatus, deductions, number of
kids, blah, blah, blah, how muchgoes into the 401k, blah, blah,
blah.
So that's income tax.
But the savings in thathypothetical that Jack laid out
(26:54):
is of that $200,000, theself-employment tax was only
paid on $60,000.
So only the self-employment taxwas only paid on 60,000.
The other 140 was there was a15.3% tax savings and
self-employment taxes on that140.
So there's a little limitationon it because that 15.3%
(27:16):
consists of Social Securitytaxes and Medicare taxes and
there's a wage limit on SocialSecurity.
It's about 170.
It adjusts each year forinflation.
So let's just say that of that140, you just saved 15.3%, which
is $21,420.
And then, just because you'realready over the Social Security
wage base.
(27:36):
Maybe chop off $4,000, becausenot all of that.
140 is subject to 15.3%.
A chunk of it's only subject to2.9.
Medicare Bottom line is in thathypothetical that Jack laid out
because you're an S Corp at$200,000, taking a $60,000
salary instead of like apartnership LLC for the full
200,000, you saved about $17,000in self-employment taxes just
(27:59):
by being an S Corp.
Speaker 1 (28:01):
God bless America.
I mean as we lay this out forpeople to understand because
you're right.
People come from corporateAmerica and say, well, I have to
make $500,000.
I get it.
It's nice to say, but as you'rebuilding a business, these
little things are going to helpyou keep so much more money in
your pocket.
And as you grow, you will haveopportunities to have to have
(28:21):
conversations with professionalslike Michael.
How do we need to adjust as wegrow, cause if you might want to
buy a house one year, you know.
So that's why having aprofessional like Michael is so
important for you businessowners, or future business
owners, because and, by the way,don't try and do it yourself.
In the beginning, I made thatmistake and, believe me, I paid
(28:42):
for it.
Hire a professional from dayone to help you do all of this.
Speaker 2 (28:48):
Agreed Amen.
Speaker 1 (28:49):
Amen to that, Michael .
Give us your contactinformation one more time for
the folks that might want toreach out to you.
Speaker 3 (28:56):
Yeah, absolutely so.
Visit my website.
It's readercpagroupcom, that'sR-E-E-D-E-R-C-P-A-G-R-O-U-Pcom.
You can go there.
There's a contact us page thatyou can fill out and our team
will reach out to you ASAP.
My email is michael atreadercpagroupcom.
Shoot me an email.
We'd be happy to schedule acall with you.
(29:17):
And also, my biggest socialmedia platform that I'm most
active on is LinkedIn, so youcan just search me on LinkedIn.
That's my first, middle andlast name.
My middle name is Ian I-A-N.
So Michael Ian Reader CPA.
Find me on LinkedIn, connectwith me on LinkedIn and let's
schedule a time to talk and youjust had a new baby didn't you
Just had a new baby?
(29:37):
yes, a little baby boy.
So his name is Arthur, he justgot home a couple of days ago,
and his older sister, raylee,our four-year-old.
She's thrilled to be a bigsister.
So yeah, so exciting times atthe Reader household.
Speaker 2 (29:50):
So cute Congrats.
Speaker 1 (29:51):
Congratulations.
That's so exciting.
Thank you so much.
Michael, thank you for spendingtime and he's right.
By the way, he is an animal onLinkedIn.
He's constantly on theresharing content, sharing
information, linkedin, really.
And actually, michael, beforeyou go, this is something.
As you know, we're growing ourteam and adding franchise
consultants, which we're soexcited about.
We're sharing with them.
(30:13):
It is so important to be onLinkedIn.
You gotta be out there tellingpeople and I think today more
than ever, I feel like back inthe day, we all kind of held
back on stuff.
Right, we give you a little bit, but then we want you to
contact us.
Now it's all about, nope, share, share what you do, share how
you help people.
Any any uh quick tips for forLinkedIn strategy for the folks
out there.
Speaker 3 (30:34):
Um, so, uh, I would say I would say um and I, I, you
know, I, I, I stole this fromAlex Ramosi.
He probably stole it fromsomewhere else.
But if you're making less thana million dollars, then just
spend four hours a day on doingwarm outreach, which is just
outreach to your warm network,on LinkedIn, in your CRM, and
(30:58):
posting your own content.
You know, or you know your owncontent, you know creating posts
, you know your own creative.
Just do that right.
And then it's just one of thosethings that and then also
engage on other people's posts.
You know engaging in otherpeople's posts before you, you
know.
You know message them in theDMs for the direct ask.
(31:19):
That's another.
That's another way of kind oflike you know softening up the
direct ask.
And's another.
That's another way of kind oflike you know softening up the
direct ask and in directmessaging.
But just, um, you know timeblock and and put into work.
Um, you know it's.
You know just setting up yourprofile, but oh, I'm on linkedin
or I'm on other fill in theblank social media platform is
not good enough.
You have to put in the work.
And like you have to put in thework, you know just like, don't
(31:40):
, don't solely rely on ai tolike send automated.
Like you know, people like cancan smell ai messages from a
mile away and not saying they dohave their purpose if used
strategically and stuff likethat.
But, um, you know, you have toput in the time to do warm
outreach on, you know, warmemails, warm linkedin messaging
(32:00):
and create content common inother people's posts.
Put in the time to do that forfour hours a day, five to seven
days a week for a year and seewhat happens.
It's not going to happenovernight, but you got to put
the time in and it just seemslike a lot of people, a lot of
people these days just areimpatient and they want
(32:23):
immediate results.
Like put the work in and nextthing you know, a year goes by
and it's like wow, like a lot, alot will happen, a lot can
happen in a year if you put inthe work.
Speaker 1 (32:33):
You know, it's so, so weird about LinkedIn and even
social media in general, andJill and I have always laughed
about this because we've alwaysbeen big proponents of a lot of
social media posts.
Laughed about this becausewe've always been big proponents
of a lot of social media posts.
Some of our posts that havereceived the least amount of
engagement meaning likes andcomments have resulted in in
messages on the backend.
So from the outside and I knowpeople get discouraged it's like
(32:54):
oh man, I'm only getting liketwo likes and this dude's
getting like 5 zillion.
Keep pumping out the contentbecause someone will see it, it
will resonate with them.
But it has to be like Michaelsaid.
You can't just go into chat,gpt and say create a post and,
by the way, we can see it,because when those cute little
emojis and check marks are allover your post.
Speaker 3 (33:13):
We know who wrote it Exactly.
Yeah, and you bring up a goodpoint, jack.
Like the lurkers.
The lurker, you know where itsays like, likes and comments on
it.
Likes and comments on it.
That's one thing.
But then like the impressionsis another metric.
And like the lurkers are theones that are like.
They see it.
They may have not liked it orcommented, but they see it, and
they are the ones that arereaching out to you on the back
end.
Speaker 2 (33:33):
Sometimes it's just time and place.
You know you get them at theright time.
But if you're putting it outthere consistently, at some
point it will reach someone.
And we all go back.
We all go back and check peopleout.
So you know there's that too,but you never know.
It might hit someone that day,but they're not ready to pull
the trigger.
Speaker 1 (33:49):
And then Well, and you, I'm sorry, go ahead.
Speaker 2 (33:53):
No, no, no, it's just eventually they will if it
sticks with them, and thenultimately they continue.
Speaker 1 (33:58):
You know it makes no and you get to grow your brand
like we all have, like our, ourstyle of content, whether you're
a franchise brand or you're afranchise consultant.
I think it enables people tosee this is who this person is.
I, I identify with them, I knowtheir story and so that's the
great thing.
I think it's a really valuableplace to be.
So, michael, thank you for yourtime.
(34:18):
Great information, uh, I know alot of our clients will
appreciate you so much, anddefinitely you've got Michael's
contact information.
Reach out.
If any of you would like a freefranchise consultation from
Jill or I, please feel free totext us 305-710-0050.
We also have a team page on ourFranchise Insiders website,
thefranchiseinsiderscom.
Feel free.
(34:38):
If you don't want to work withus, work with Brian.
Work with David.
Work with Jennifer.
If you don't want to work withus, work with Brian.
Work with David.
Work with Jennifer.
Give us a call 800-445-6382.
Michael, thank you.
It's been great having you onthe podcast today.
Speaker 3 (34:49):
Jack and Jill, thank you so much for having me A real
pleasure.
Take care Bye, you too.
Hi everyone, Welcome back to the we Bought a
Franchise podcast.
I'm Jack Johnson.
I'm Jill.
Johnson and we're here today.
You guys, we have got such anexciting guest for you today and
for those of us.
Did you ever think growing upwe'd say this about talking
numbers and accounting?
Speaker 2 (00:15):
Maybe you did, I definitely did.
Speaker 1 (00:17):
Not until I became a business owner.
But I'm going to tell you guys,we have a financial powerhouse
with us on the podcast today.
His name is Michael Reeder.
He owns a firm called Reeder.
Is it Reeder?
Financial CPA?
Speaker 3 (00:30):
Help me out here, yeah, reeder CPA Group.
Speaker 1 (00:33):
Reeder CPA Group, and what's exciting about this, you
guys, is that he focuses onhelping franchisees keep more
money in their pocket.
Michael, let's get into it here.
There's so many things I wantto talk to you about, I don't
even know where to begin, buthere's where I think we can, and
I want you to tell the folkswho you are and what you do.
But this is just an example.
So I was having a chat with myfriend, chat GPT, yesterday.
Speaker 3 (01:01):
I call him chatty.
I call him chatty, I love it.
Speaker 1 (01:05):
Okay, so, uh, we acquired a new vehicle this year
that we use for business.
It's not one of our pinkstrucks, it's a.
It's a, it's a uh, it's an SUVthat we use to go to client
meetings and things like that.
I would say that over 50% ofits use is is for our company.
Um, so chatPT and I weretalking about all the ways that
(01:26):
we might be able to use that tohelp knock down some of our tax
burden.
I also asked ChatGPT and thisis where I'm going to bring you
in hey, there's a 20-year-oldcar that I'm looking at that I
like.
Can I also write that off if Iuse it for business?
So, Michael, why don't we usethis as a point to come in here
and tell the folks how leasingcompany vehicles, whether they
(01:46):
be vans, like we have for PINX,or even just a personal car that
we use for business, can helpus knock down some of our tax
burden?
Speaker 3 (01:54):
Yeah, absolutely.
This is one of the most commonquestions that I get as a CPA
that works with a lot of smallbusiness owners how to approach
writing off the vehicle, how toapproach automobile expenses.
And this is one of the subjectmatters where you could talk to
10 different CPAs and get 10different answers.
(02:14):
And so I like to approach how Iwas raised.
I'm from Chicago, I cut myteeth in this industry, learning
from some creative, strategicCPAs from Chicago, and so I like
to approach write-offs from theangle of not hey, can I deduct
this, yes or no, but how do Ideduct this?
And so, at the end of the day,the tax code is written for the
(02:35):
self-employed, and so if youhave vehicles and you're using
them in the context of yourbusiness, then how can we write
them off?
And for the two of you, youhave your franchise consulting
business and your pinks windowcleaning business, so you have
multiple businesses, right, andso you know.
So I'm a big.
So my default when it comes toauto my, my default is I'm a big
(02:59):
fan of purchase and heavilyfinance.
Now there are times whenleasing may make sense.
But I'm a big fan of purchaseand heavily finance.
Now there are times whenleasing may make sense.
But I'm a big fan of purchasingand heavily financing for the
following four reasons, right.
So I always start out with mydefault and then if I go to you
know, if the lease terms are,like you know, crazy good, then
okay, but purchase and heavilyfinance.
For one, because you purchaseit by owning the asset, you get
(03:21):
to benefit from the depreciationexpense.
Right, section 179 or bonusdepreciation.
You get to benefit from thedepreciation expense because you
own the asset, as opposed toleasing it.
But heavily finance it becauseI'm a big fan of strategic use
of good debt, and so I am verycomfortable with a leverage
strategy.
When it comes to growing mybusiness, we do it for real
(03:42):
estate, why not do it for ourbusiness?
And so when it comes topurchasing, heavily financed,
heavily financed then that way Ican get all of that
depreciation with zero or veryminimal down.
So then that way I can preservemy liquidity for other working
capital purposes.
Speaker 1 (03:57):
That's what I thought you meant.
So let me see if I'munderstanding this, because this
is exactly what we did.
So let me see if I'munderstanding this, because this
is exactly what we did.
We paid nothing down on thatvehicle and we absolutely we
financed it, we own it, wedidn't lease it, but we put
nothing down because we ran thenumbers and it was like the
monthly it's minuscule.
If you put five grand down, itdoes nothing.
(04:19):
And I've seen franchisees,michael, make this mistake where
the SBA told them go buy threevans outright, take 150 grand of
your working capital and put itinto vans.
You don't even have jobs.
For I'm like no, no, no, no,never do that.
So it sounds like we're on thesame page.
Speaker 3 (04:36):
We're definitely on the same page.
So take full advantage of thedepreciation write-off while
preserving your liquidity forother working capital purposes.
And then it's a loan.
So the interest on the loan youcan write the interest off as
well as a business expense, andso that's reason number three.
And then reason number four isyou have an asset that has
trade-in value for down the road, when you need to trade it in
(04:57):
for the new vehicle.
So my default for those fourreasons I have a blog post on it
on my website purchase andheavily finance for those
reasons.
Speaker 1 (05:15):
Michael, what's your website?
ReadercpagroupcomR-E-E-D-E-R-C-P-A groupcom.
Okay, that's awesome.
And so ChatGPT told me that Icould capture, and this is where
I need like a real person totell me that, let's say, the car
costs 50 grand, that I couldwrite off that entire amount in
year one.
Is chat GPT wrong?
Speaker 3 (05:30):
So there's when there are nuances, right.
So is it bonus depreciation oris it section 179 depreciation?
Is it an SUV or is it a heavyduty truck?
What's the weight?
You know there's lots ofzigging and zagging that can go
into all of it.
And so ChatGBT always says theyalways preface the tax advice
questions in it with you shouldtalk to a tax advisor and all
(05:50):
that type of stuff, just becausethere are lots of different
except, yes, but in thissituation, et cetera, et cetera.
And so I would say, for themost part again getting back to
what I was saying we will alwaysfind a way to maximize the
write-off and if there's anylimitation, if you're not able
(06:11):
to write off the entire amount,then you're going to be able to
write off the majority of theamount and then the remaining
undepreciated amount in year onewill be written off in years
two through five, but it's still, whether it's all of the 50k or
it's the majority of it, it'sstill a massive amount.
And then that brings up whatwe're all kind of keeping our
finger on the pulse right now,waiting on is what's going to
(06:32):
happen with tax reform, becausethis is like it's like the
difference between bonusdepreciation and section 179
depreciation is really importantto understand.
Section 179 depreciation allowsyou to write off the entire
amount of the fixed asset, ofthe qualifying fixed asset, in
the year of incurrence.
There's some limitations withthe vehicles but it's only to
(06:53):
the extent of profit or otherself-employed non-passive income
on your tax return.
So if you have a profit of$100,000 and you purchase a
qualifying fixed asset for$70,000, then you can write it
off the full $70,000 in year one.
But if you have a $20,000profit or you're at a loss
(07:17):
already before the depreciation,then the Section 179, you can't
write it all off because it'sonly to the extent of profit and
you either have a $20,000profit or you're already at a
break even or negative beforetaking depreciation.
But if you have anotherbusiness that flows through to
your personal tax return andthat one's profitable, then the
section 179 can offset that.
But if you don't, then itcarries forward.
Speaker 1 (07:39):
Let me ask it another way.
Michael, you've got me soexcited I got to jump in time.
Yeah, michael, you've got me soexcited I got to jump in.
Yep, let's say that I'm a firstyear franchisee and I didn't
yet I'm not profitable, right?
And so I don't necessarily needthat big write off this year.
I can amortize it over thecourse of a few years, right?
So if I don't want to take thefull thing this year, I don't
have to.
Speaker 3 (08:00):
You don't have to Correct and so.
But then there's anotherimportant type of accelerated
depreciation called bonusdepreciation.
Now, bonus depreciation is notSection 179.
And here's, and so, as I'm surethe two of you know, maybe the
maybe some people in theaudience do and some don't Bonus
depreciation has been gettingphased out over the last few
(08:21):
years.
So, bonus depreciation you usedto be able to write off 100% of
the qualifying fixed asset inthe year of purchase, regardless
of where your bottom line isbefore the write off, right.
So it's like if you're alreadyat a break even or a loss and
you just have your one startupbusiness and you have no other
self employed business, it'sjust your one startup business
(08:42):
and it's at a loss, then thebonus appreciation would further
the loss, right and so.
But it's been getting phasedout.
It was, you know, in 2023, itwas 80%, 24, it was 60%.
Now in 25, it's 40%.
But the rumblings are, you knowCongress and you know, president
are going to, you know, as partof the big, beautiful bill that
we're all waiting on, you know,with tax legislation, they're
(09:05):
going to bring bonus back to100%, which would be amazing.
All the more reasons to youknow, like another reason the
tax code is written for theself-employed.
The Tax Cuts and Jobs Act backin 2017, 2018, was pro small
business, primarily with thequalified business income 20%
deduction and but now with this,if bonus comes back to 100,
(09:28):
it's going to be huge becauseyou have a startup business
right and you can't reallyqualify for section 179 because
you're already at a loss.
It's expected that a startupbusiness is going to be at a tax
loss, but bonus coming back to100% is going to be huge and so
hopefully that happens effective2025.
Speaker 1 (09:46):
That big, beautiful bill.
Speaker 2 (09:48):
Okay, I gotta pop in here because, like this feels
like a foreign language to meand I'm so, michael, can you
tell us, like obviously, yourwealth of knowledge?
Can you tell us a little aboutyour background and what you do,
because I know we kind ofjumped right into the exciting?
stuff but clearly you know whatyou're talking about.
So, um, can you tell everyonesort of you know how you got to
(10:09):
this place, to know everythingand your background and what
you're doing now?
Um, cause it's very impressiveto me as someone that really
feels like you guys are speakinga foreign language.
Speaker 1 (10:18):
And before he goes there one sec, I have to just
tell you what set us off, holdon before and she's is that I
saw this.
We're working with a client andMichael sent her this email how
she should structure hercorporation in like two
different ways.
Like she's in one state, butthen we're going to have an S
over here and we're going tohave this over in this state and
I'm like Holy smokes, thisguy's so smart, this is
(10:39):
brilliant.
So, michael, with that, yes,please tell us about you.
Speaker 3 (10:44):
Absolutely, absolutely so, jill and Jack and
the audience.
So I'm 38 years old.
I own the firm now that hiredme out of college.
I've been in public practice asa CPA for about 14 and a half
years.
I'm originally from Chicago.
We still have an office in theChicago suburbs.
I've been living in thePortland Maine area as my
(11:10):
primary residence for the lasttwo and a half years with my
family.
We have a couple offices inPortland as well, and we're a
virtual national CPA firm withclients all across the country
and team members all across thecountry.
Our team is all stateside, nooffshore, and over the last 11
years I've developed a nicheworking with franchisee
businesses.
It's a fun story when I was theminority partner of the firm
(11:31):
that I now own outright back in2014, we acquired a small book
of business in the Chicagosuburbs and we merged it into
our practice.
It was only like $150,000 bookof business, but one of the
clients in that book of businesswas a franchise consultant and
he's retired today, but Iconsider him one of my mentors.
(11:52):
He was in franchising for over50 years, either on the XOR side
, the Z side, or as a consultant, and so I'm doing his taxes,
and it's 2015 at the time andI'm doing his taxes for 2014.
And I'm like, hey, and so hehas an S corp for his franchise
consultancy and I've never heardof him.
What's a franchise consultant?
And so he tells me what he doesand how he makes money and I
(12:15):
thought it was reallyinteresting and I'm just like,
hey, you know, just, I'm herefor your candidates.
You know, as you're workingwith your candidates and they
have any questions about entitystructure strategy, funding
strategy, tax strategy for smallbusiness ownership, I'll talk
to them for free and and and.
So you know, know, and I'lldive into these topics.
(12:35):
And so he took me up on on myoffer.
He sent me a few candidates uh,it was, you know, it proved
constant, that value wasprovided.
And then, you know, then thoseand I told this candidate like
hey, like you know, if you wantto work with me moving forward,
you know we can always have thatconversation.
So the candidate got valuebecause they got, you know,
valuable advice during thiscrucial phase.
You know, looking to buy abusiness, um, uh, the consultant
got value because I got, youknow that, valuable advice
during this crucial phase.
You know, looking to buy abusiness.
(12:55):
The consultant got valuebecause I got, you know, that
consultation got the candidatethat much more fired up and
clarity provided on entitystructure, funding, tax, blah,
blah, blah than they had before.
Right, thus increasing the youknow, making it that you know,
reducing any sort of wet andcold feet or whatever when it
comes to signing the franchiseagreement.
Right, commission gets paid toconsultant.
(13:19):
And then it's a win for mebecause I get to get in front of
a client who I have potentialof a prospect you know to.
You know I have the potentialto get a lifetime client, year
over year over year, and soproved concept with that.
Did that a few times with someof his candidates and then I was
like, hmm, okay, now let mejust go hit the LinkedIn circuit
and just start finding otherfranchise consultants.
And so I'm essentially doingthe same thing today, at a
(13:41):
bigger scale that as I was backthen.
So I have a nationwide networkof franchise consultants.
I am, I am a vendor, cpa memberof France, serve as well, as you
know, some of the otherfranchise referral networks, and
so I've built up a nationwidenetwork of franchise consultants
over the last 11 years and overthe last few years now there's
(14:03):
franchisors that are starting tosee the value and so I'm
leaning more into the franchisorside as well.
And so it's so much fun.
I work with a ton of militaryvets.
I work with a lot of corporaterefugees.
I'm not the franchiseconsultant right, jack and Jill
are the franchise consultantsbut when it comes to hey, entity
structure strategy, fundingstrategy, diving into that stuff
(14:26):
, what my process has proven isit's a better hey talk to reader
about this stuff is a betteralternative than go talk to a
reader about this stuff is abetter alternative than go talk
to your CPA.
Because, one, a lot of peopledon't have a CPA.
And, number two, people that dohave a CPA, they're just a tax
prepared.
They just prepare taxes like apersonal tax return.
They don't really dive intostrategy.
(14:46):
They have no idea what the RobC Corporation is and all the
nuances that go into the Rob CCorporation.
They don't approach entitystructure and funding strategy
from the angle of strategic taxplanning.
So my industry like to bring itin for a landing.
My industry is very deadlineheavy, right, there's busy
season, there's not.
You know, we just got throughApril 15th, so you know, and so
but what I'm doing 12 months outof the year, regardless of
(15:09):
deadline or not.
Deadline is I'm talking toprospective franchise buyers,
diving into everything thatwe're talking about right now.
Speaker 1 (15:16):
I mean, it's such a valuable service and to have
someone as knowledgeable as you,especially when it comes to
franchising, is key.
So, Michael, let's get intothis.
S-corp versus C-Corp versus LLCversus LLC taxed as an S.
Speaker 3 (15:36):
Yeah.
So I've developed what I liketo call my three bucket approach
, my three bucket methodology,to entity structure and funding
strategy, coming at it from theAnglo strategic tax planning.
I know that's a mouthful and Ihave to figure out how to
tighten that up, but essentiallyover the last 11 years I've
developed a process right whenI'm talking to a prospective
franchise buyer and they've gotquestions about entity structure
(15:59):
and funding.
Right and everything you justsaid, jack, right, llc, s Corp,
llc, texas and S Corp, just apure S Corp, rob C Corporation,
blah, blah, blah.
Before we even like, I can'tadvise anyone on any of that
stuff until I get context on thefollowing three things right,
the following three bucketsBucket one what's the investment
level, initial plus the first12 months?
I want to know the initial plusthe first 12 months.
(16:20):
I know that item seven isreally just initial, but initial
plus the first 12 months, allin ballpark total of that amount
, how much is the franchise fee?
I like to know the franchisefee because I have to explain to
them how the franchise fee getstreated for tax purposes.
But investment level number one.
Bucket two what's theallocation of assets on the
personal financial statement?
I'm looking for cash, otherliquidity, retirement and real
(16:43):
estate.
And then bucket three what'sthe household income situation
looking like?
Once I have all those threethings on a piece of paper and I
always take my own notes and Igot the AI always listening tax
as a partnership, to start withan sba loan, um, and then, once
all of the losses are are usedup for tax.
(17:22):
But you know, in year three,take that llc and elected for s
corp, because now we can savemoney in social security,
medicare taxes, because it'sprofitable, right, like and I
like.
So you know, once I get contexton those three buckets, I might
talk to candidate one right, go, llc partnership with an SBA
loan, and here's why, right.
And then I might go Rob Ccorporation for candidate.
I might advise, you know,candidate number two to go Rob C
(17:46):
corporation, and here's why.
The why is always going to bebehind what I'm advising.
And so there is no, you know.
You know there is no.
Like painting everything withone broad brushstroke.
You know, like it's all, likeeveryone has their own unique
set of circumstances, likeeveryone's answers to their
three buckets respectively andhow they're all attached at the
(18:07):
hip.
That's unique for candidate A,it's unique for candidate B and
candidate C.
And so that's why Rob Secordmight make sense so much sense
for some person, but not foranother.
And it's based off those threebuckets.
And then you have toacknowledge the human aspect of
it, right?
I personally am very comfortablewith what I like to refer to as
(18:29):
strategic use of good debt andalso using other people's money
instead of my own, preserving mynest egg other people in the
context of bank and SBA, andalso I'm a big fan of leveraging
my nest egg assets beforeliquidating them.
For me, I'm very comfortablewith that stuff, and so are lots
of entrepreneurs.
There are some people that arejust maybe it was like a
(18:50):
traumatic they witnessed theirparents file, get know, like you
know for get their houseforeclosed on or whatever it is.
But some people just hate, hate, the D word, right, they hate
debt, they hate debt.
And so I might talk to someone,and for reasons x, y or z,
based off of what they put ontheir three, but you know what,
you know assets, income,investment I would say, oh my
(19:10):
God, llc, texas and SBA loan I'msorry, texas and S Corp with an
SBA, blah, blah, blah.
It makes so much sense for you,candidate A, I just don't want
to take on debt.
I'd rather put my cash at riskor my retirement rollover.
It's like, okay, but at leastthey know, at least they.
(19:32):
You don't have to agree with mewhen I advise you, but, like um
, most people tend to becausethey, they learn a lot of things
.
But every now and then someonewill be like mike, I hear you
and I appreciate all of it, butI'm still gonna go this route
because I just I don't want totake on debt and that's fine,
but what's gonna no matter whatthey're gonna get an education,
no matter what it's a personaldecision and I get that.
Speaker 1 (19:50):
I mean I'm inclined as a sort of long time
entrepreneur grow up withentrepreneur both Jill and I did
.
There's different seasons ofdebt.
You know there are seasons ofyour business where you're going
to bring in a lot of cash andyou can knock out that debt in
two seconds.
If you have the opportunity,like so many people did a few
years ago to get an SBA loan forlike a 1% rate, you get it.
(20:13):
Just like with the mortgages afew years ago.
If you could refinance to 1%,you take it, you grab it.
Now, all of a sudden, your homehas become a massive part of
your retirement strategy and youcan leverage that.
Now you can take a home equityline of credit that you might've
never been able to get beforebecause your house is increased
in value so much.
So you're right and I agreewith what you're saying, um, a
(20:39):
hundred percent.
Let's give the folks somethingthat that they can take away.
Here let's talk about cause.
I think there's a lot ofconfusion when it comes to
paying a franchise fee.
I think most people, when theystart this journey, are under
the impression that they canwrite that off.
And it's not.
You can't.
You can, yes, but on all deferto the expert.
It has to be amortized overtime.
So, michael, two questions.
Let's talk about the totalamortization structure of how we
(21:01):
do that with a franchise fee,and also throw in what if we
sell our business.
Let's say our average franchiseagreement is 10 years right,
because that's going todetermine the amortization
schedule.
But let's also talk about aboutI sell my business in year six,
then what happens to thatamortization?
Maybe tell us about that?
Speaker 3 (21:19):
Yeah, absolutely so.
A franchise fee is what's knownas a section 197 intangible
asset.
So what that means in Englishis it's an asset, so you can't
write it off in full in the yearof incurrence like you can
other expenses like training,marketing, labor etc.
And it also doesn't qualify forthe Section 179 depreciation
(21:43):
and bonus depreciation likevehicle furniture, fixtures,
build out, blah, blah, blah.
It's a Section 197 intangibleasset, which means that you have
to capitalize it as an assetand for income tax purposes you
have to amortize it over 15years, even if the life of the
territory is only 10 years.
Now maybe your bookkeeper willdo book amortization you know
(22:05):
like, for amortization for bookpurposes might be 10 years, but
amortization for income taxpurposes is 15 years.
Be 10 years, but amortizationfor income tax purposes is 15
years, even if the life of theterm is of the franchise
agreement is less than 15 years.
And so you will get the taxbenefit of the of the franchise
fee through amortization over anextended period of time.
And then if you sell thebusiness in year seven, right,
(22:28):
and you have an asset sale, thenthe unamortized amount of the
franchise fee at the time ofsale is going to count towards
your cost basis in the assetsthat get sold, thus decreasing
your capital gain or increasingyour capital loss, depending on
the situation when you sell.
But you're going to get the taxbenefit of the unamortized
(22:53):
amount at time of sale.
Speaker 1 (22:57):
So you can claim the whole.
If you sold even in, let's say,year four and you've still got
11 years left on an amortizationschedule but you sell, you then
can capture the rest of thatdepreciation in the year you
sell.
Correct, exactly, perfect.
You see, these are things it's.
It's interesting there's allthese little nuances, Michael,
that people don't understand.
(23:18):
I mean, um, when it comes tothe ability to keep more money
in your pocket, like another onethat we get is, is people
wanting to understand if theyhave an S corp, if they can draw
, what type of salary they drawand how they can also live off
off they can use.
They can also pay themselvesthrough distributions.
Do you mind diving into that alittle bit?
Speaker 3 (23:38):
Yeah, absolutely, and I have a great fact sheet on
S-Corp shareholder, how you payyourself between salary and
distribution.
And so what I tell S-Corpowners, especially new ones, is
when people hear the word salary, they go back into like you
know, like salary is this thingthat you get once every two
weeks you get a check stub and,like all the taxes, you know
(24:00):
you're doing all the work.
Government gets paid first, youget paid last, and then so
people think salary.
Now that you're a businessowner, you have your own S-corp
or LLC taxes and S-corp or justpure escrow and you're the owner
and you have to um, you have topay yourself.
It's like no, throw all thatout the window, all of it out
(24:22):
the window.
So owner's salary for an S-corp?
It's just this thing that we doto readjust a portion of the
profit as owner's salary inorder to control, to mitigate
how much that you pay in SocialSecurity and Medicare taxes each
year.
So Social Security and Medicaretaxes for self-employed they're
(24:44):
what's known as self-employmenttaxes and self-employment tax if
your entity is taxed either asa sole proprietorship, like a
single-member LLC taxed as asole proprietorship, or a
multi-member LLC taxed as apartnership.
In those two taxclassifications right, sole
proprietorship and partnershipthat net business income is
subject to both income taxfederal and state, depending on
(25:05):
what state you're in and also15.3% self-employment tax,
that's the employee and theemployer portion of Social
Security and Medicare tax 15.3%the entire amount is subject to
self-employment tax if you're asole proper partnership
structure.
But if you elect S-Corp thenyou take a portion of that
profit and you reclassify it asowner's salary and you pay the
(25:28):
15.3% on the owner's salary onlyand the remaining S-corp profit
is still subject to income taxbut not subject to 15.3%.
There's different.
Again another classic ask 10different CPAs and 10 different
answers.
Speaker 1 (25:43):
Yeah, with the S-corp .
Let's say a company had a netof 200 grand and the owner draws
a salary of $60,000.
What percentage is the companytaxed on the profit so the
bracket of the profit, $200,000,or the owner's salary?
Is that owner paying tax onwhat he or she made in income or
(26:05):
is it on the profit of thecompany?
Speaker 3 (26:08):
Great question.
So the $200,000 in this context, everyone that Jack laid out
that $200,000 is going to flowthrough to the personal tax
return of the owner in twopieces there's going to be a
$60,000 W-2 from the S-Corp andthere's going to be a $140,000
K-1 from the S-Corp.
And so both of the 60 and the140, $60,000 W-2 and $140,000
(26:34):
K-1 still equals $200,000.
And it's going to go to thepersonal return and be subject
to income tax, depending on allthe different factors that are
on the personal return filingstatus, deductions, number of
kids, blah, blah, blah, how muchgoes into the 401k, blah, blah,
blah.
So that's income tax.
But the savings in thathypothetical that Jack laid out
(26:54):
is of that $200,000, theself-employment tax was only
paid on $60,000.
So only the self-employment taxwas only paid on 60,000.
The other 140 was there was a15.3% tax savings and
self-employment taxes on that140.
So there's a little limitationon it because that 15.3%
(27:16):
consists of Social Securitytaxes and Medicare taxes and
there's a wage limit on SocialSecurity.
It's about 170.
It adjusts each year forinflation.
So let's just say that of that140, you just saved 15.3%, which
is $21,420.
And then, just because you'realready over the Social Security
wage base.
(27:36):
Maybe chop off $4,000, becausenot all of that.
140 is subject to 15.3%.
A chunk of it's only subject to2.9.
Medicare Bottom line is in thathypothetical that Jack laid out
because you're an S Corp at$200,000, taking a $60,000
salary instead of like apartnership LLC for the full
200,000, you saved about $17,000in self-employment taxes just
(27:59):
by being an S Corp.
Speaker 1 (28:01):
God bless America.
I mean as we lay this out forpeople to understand because
you're right.
People come from corporateAmerica and say, well, I have to
make $500,000.
I get it.
It's nice to say, but as you'rebuilding a business, these
little things are going to helpyou keep so much more money in
your pocket.
And as you grow, you will haveopportunities to have to have
(28:21):
conversations with professionalslike Michael.
How do we need to adjust as wegrow, cause if you might want to
buy a house one year, you know.
So that's why having aprofessional like Michael is so
important for you businessowners, or future business
owners, because and, by the way,don't try and do it yourself.
In the beginning, I made thatmistake and, believe me, I paid
(28:42):
for it.
Hire a professional from dayone to help you do all of this.
Speaker 2 (28:48):
Agreed Amen.
Speaker 1 (28:49):
Amen to that, Michael .
Give us your contactinformation one more time for
the folks that might want toreach out to you.
Speaker 3 (28:56):
Yeah, absolutely so.
Visit my website.
It's readercpagroupcom, that'sR-E-E-D-E-R-C-P-A-G-R-O-U-Pcom.
You can go there.
There's a contact us page thatyou can fill out and our team
will reach out to you ASAP.
My email is michael atreadercpagroupcom.
Shoot me an email.
We'd be happy to schedule acall with you.
(29:17):
And also, my biggest socialmedia platform that I'm most
active on is LinkedIn, so youcan just search me on LinkedIn.
That's my first, middle andlast name.
My middle name is Ian I-A-N.
So Michael Ian Reader CPA.
Find me on LinkedIn, connectwith me on LinkedIn and let's
schedule a time to talk and youjust had a new baby didn't you
Just had a new baby?
(29:37):
yes, a little baby boy.
So his name is Arthur, he justgot home a couple of days ago,
and his older sister, raylee,our four-year-old.
She's thrilled to be a bigsister.
So yeah, so exciting times atthe Reader household.
Speaker 2 (29:50):
So cute Congrats.
Speaker 1 (29:51):
Congratulations.
That's so exciting.
Thank you so much.
Michael, thank you for spendingtime and he's right.
By the way, he is an animal onLinkedIn.
He's constantly on theresharing content, sharing
information, linkedin, really.
And actually, michael, beforeyou go, this is something.
As you know, we're growing ourteam and adding franchise
consultants, which we're soexcited about.
We're sharing with them.
(30:13):
It is so important to be onLinkedIn.
You gotta be out there tellingpeople and I think today more
than ever, I feel like back inthe day, we all kind of held
back on stuff.
Right, we give you a little bit, but then we want you to
contact us.
Now it's all about, nope, share, share what you do, share how
you help people.
Any any uh quick tips for forLinkedIn strategy for the folks
out there.
Speaker 3 (30:34):
Um, so, uh, I would say I would say um and I, I, you
know, I, I, I stole this fromAlex Ramosi.
He probably stole it fromsomewhere else.
But if you're making less thana million dollars, then just
spend four hours a day on doingwarm outreach, which is just
outreach to your warm network,on LinkedIn, in your CRM, and
(30:58):
posting your own content.
You know, or you know your owncontent, you know creating posts
, you know your own creative.
Just do that right.
And then it's just one of thosethings that and then also
engage on other people's posts.
You know engaging in otherpeople's posts before you, you
know.
You know message them in theDMs for the direct ask.
(31:19):
That's another.
That's another way of kind oflike you know softening up the
direct ask.
And's another.
That's another way of kind oflike you know softening up the
direct ask and in directmessaging.
But just, um, you know timeblock and and put into work.
Um, you know it's.
You know just setting up yourprofile, but oh, I'm on linkedin
or I'm on other fill in theblank social media platform is
not good enough.
You have to put in the work.
And like you have to put in thework, you know just like, don't
(31:40):
, don't solely rely on ai tolike send automated.
Like you know, people like cancan smell ai messages from a
mile away and not saying they dohave their purpose if used
strategically and stuff likethat.
But, um, you know, you have toput in the time to do warm
outreach on, you know, warmemails, warm linkedin messaging
(32:00):
and create content common inother people's posts.
Put in the time to do that forfour hours a day, five to seven
days a week for a year and seewhat happens.
It's not going to happenovernight, but you got to put
the time in and it just seemslike a lot of people, a lot of
people these days just areimpatient and they want
(32:23):
immediate results.
Like put the work in and nextthing you know, a year goes by
and it's like wow, like a lot, alot will happen, a lot can
happen in a year if you put inthe work.
Speaker 1 (32:33):
You know, it's so, so weird about LinkedIn and even
social media in general, andJill and I have always laughed
about this because we've alwaysbeen big proponents of a lot of
social media posts.
Laughed about this becausewe've always been big proponents
of a lot of social media posts.
Some of our posts that havereceived the least amount of
engagement meaning likes andcomments have resulted in in
messages on the backend.
So from the outside and I knowpeople get discouraged it's like
(32:54):
oh man, I'm only getting liketwo likes and this dude's
getting like 5 zillion.
Keep pumping out the contentbecause someone will see it, it
will resonate with them.
But it has to be like Michaelsaid.
You can't just go into chat,gpt and say create a post and,
by the way, we can see it,because when those cute little
emojis and check marks are allover your post.
Speaker 3 (33:13):
We know who wrote it Exactly.
Yeah, and you bring up a goodpoint, jack.
Like the lurkers.
The lurker, you know where itsays like, likes and comments on
it.
Likes and comments on it.
That's one thing.
But then like the impressionsis another metric.
And like the lurkers are theones that are like.
They see it.
They may have not liked it orcommented, but they see it, and
they are the ones that arereaching out to you on the back
end.
Speaker 2 (33:33):
Sometimes it's just time and place.
You know you get them at theright time.
But if you're putting it outthere consistently, at some
point it will reach someone.
And we all go back.
We all go back and check peopleout.
So you know there's that too,but you never know.
It might hit someone that day,but they're not ready to pull
the trigger.
Speaker 1 (33:49):
And then Well, and you, I'm sorry, go ahead.
Speaker 2 (33:53):
No, no, no, it's just eventually they will if it
sticks with them, and thenultimately they continue.
Speaker 1 (33:58):
You know it makes no and you get to grow your brand
like we all have, like our, ourstyle of content, whether you're
a franchise brand or you're afranchise consultant.
I think it enables people tosee this is who this person is.
I, I identify with them, I knowtheir story and so that's the
great thing.
I think it's a really valuableplace to be.
So, michael, thank you for yourtime.
(34:18):
Great information, uh, I know alot of our clients will
appreciate you so much, anddefinitely you've got Michael's
contact information.
Reach out.
If any of you would like a freefranchise consultation from
Jill or I, please feel free totext us 305-710-0050.
We also have a team page on ourFranchise Insiders website,
thefranchiseinsiderscom.
Feel free.
(34:38):
If you don't want to work withus, work with Brian.
Work with David.
Work with Jennifer.
If you don't want to work withus, work with Brian.
Work with David.
Work with Jennifer.
Give us a call 800-445-6382.
Michael, thank you.
It's been great having you onthe podcast today.
Speaker 3 (34:49):
Jack and Jill, thank you so much for having me A real
pleasure.
Take care Bye, you too.
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