Tax Challenges for Growing Businesses
Every business wonders how they can pay less in taxes. Or at least that’s what the firm’s managing partner, David Goldner told me when we sat down on the set of Next Level to chat about tax challenges that growing businesses often face.
Having worked in the accounting industry for 40+ years, David is known by his clients as the guy they call when they need help figuring out how to structure their taxes to meet their future goals. That’s why I knew David would be the perfect person to cover how taxes and tax strategy relate to a company’s growth in our first episode of Next Level.
Below is the transcript from our conversation. You can watch my full conversation with David here.
Samantha Androsky: I know you've been working in the accounting industry for over 40 years. Tell me about your experience in helping businesses with their taxes.
David Goldner: So, when I started in the profession, filing taxes was a simple act of looking at a business’s income and deciding how much we are going to pay to the business owner and how much we're going to leave in the company for growth. That was a good way to balance things between the individual and the company, and that really has become the center of how taxes are done. You need to understand where a company or individual is trying to go and what they're trying to do. As you understand that, then you develop the tax plans. To me, the big part is getting to understand someone’s goals and objectives. Then you do the tax planning to fit those objectives.
S: What are some tax mistakes that you continuously see businesses who are growing make when they approach their business's taxes?
D: The most common mistake I see is that people set up their company and start operating without having really given consideration to what the best structure is going to be.
Anybody can go to LegalZoom.com and form an LLC and then be taxed as an LLC. The questions is, was that the best way to be taxed? If you're an S Corporation or a C Corporation, you could significantly reduce and eliminate some taxes. However, each of these choices has other implications. What you need to do is go through those choices and talk to a person like a CPA who can get you set up and going in the right direction. Usually, business owners don’t do that because they're too busy starting their company at the time.
S: I guess a lot of people are probably relying on Google in this day and age. They're thinking, well, I need to set up my business and they probably just hit Google for an answer, but what you’re saying it sounds like it's that they should be talking to a CPA from the get go.
D: If you want to get off in the right direction, know where you're going, and then you can figure out the right path to go on.
S: Can a business owner fix their structure later on? How?
D: That's normally where a CPA often comes in. CPAs come into a business and look at a company’s structure. Honestly, everybody's unhappy with their taxes. The first question we ask is, is this the best structure for the business? If we can change the structure and lower your taxes, that's the simplest thing we often start with.
S: How can a business solve the issue of having chosen the wrong structure? Is it talking to a CPA? Are there other things they can do?
D: I think the thing we can do is talk to them. A CPA can help a business identify the ways to help with their taxes and then figure out which methods fit. That's what should be happening every time you do tax planning. Whatever you've done can be adjusted and fixed. Depending upon where you are in the life cycle of your company, that can be really simple and no big deal. It could be something that's requested from the IRS, which normally works out just fine. So there are a lot of options, but a CPA should help you figure out where you're going and which option fits.
S: Is the structure issue something that would affect a business more in the beginning or more as their business continues to grow?
D: I always say don't let the taxes drive your business. Drive your business. Make as much money as you can. Then make the decisions you can to save taxes. You can always adjust things as you're going along. Look at everything as part of the big plan. We only have to worry about taxes if the businesses is successful. Business owners have to understand that taxes are a cost of running a successful business.
S: I know you have a ton of stories from helping businesses who are growing. Can you talk about one of those businesses and how you helped them?
D: One of the areas I do a lot of work in is the construction and real estate industry. Construction companies offer some of the most complex accounting issues and tax issues you can deal with, but they're also ones that can save a tremendous amount in taxes.
For example, I’ve had this happen before: a contractor starts a construction company and chooses to be an LLC. They pick to be an LLC because that's the easiest way to get up and running and the least bookkeeping. They choose the cash method because it's a lot easier to keep track of cash than worrying about receivables and contracts.
As the company grows, the contractor builds great relationships along the way. After all, that's how small construction companies become large construction companies. So, eventually, the contractor makes a deal with a client to build a building for them. The contractor is on the cash method, and that seems good because they normally get paid after they’ve done the work.
Then the client says, “Oh, I need to pre-pay you for next year's work.” Very few people are going to say, “No, I don't want that income.”
Since the contractor uses the cash method and the client pays them in advance, they have to report that money in income, even if they don’t bill them. A lot of people choose the cash method for simplicity, but this is when it gets complicated.
That’s when we look at the alternatives and start looking at things as a long-term contractor would. A CPA can help you make changes so that, that same contractor can take that large amount of cash that wasn’t income and make it not taxable for that year. We’d look at that kind of structure for any construction company because it's a way they should be deferring income as they're earning the cash. That's one simple example.
The other example I think that really helps people is when it comes to retirement. In my experience, the one thing that people can count on is whatever they put away in their retirement plan. When a company is making money (therefore has a significant tax liability), they’re in the right corporate structure, their accounting methods are working and all the business investments necessary are in place to save taxes, then the next major thing we do is help clients reduce their taxes for retirement plans.
That often that starts out in today's world with a 401K, which is good. However, if you have a company making a large amount of income to the owner, there's certain kinds of retirement plans where you can put away hundreds of thousands a year.
It doesn't work in every situation, but you should be questioning what’s the best option for you and your company. There are accounting methods and tax-deferred vehicles, and you want to pull all those together to have them fit the plan of the company.
S: It sounds like there's a lot of stuff that you need to know to have an effective tax strategy.
D: The most important thing is knowing that tax strategies aren’t done on April 15 when you're filing your tax returns. Tax strategies are put in place when the business is rolling along. Your CPA should walk into every year knowing what your plans are. As the year goes on, you and the CPA evaluate how the strategies are working. By making changes along the way, you get the greatest benefit.
S: So, it sounds like business owners need to be thinking about their company's future goals and in their planning processes.
D: I think 100% of a business owner’s time should be spent thinking about their goals. Don't let taxes wag your goals, let the goals decide what you're going to do tax wise.
S: We all know that taxes are obviously super important for businesses, but do you have any specific advice for business owners about their personal taxes?
D: The answer is exactly the same as for the corporate taxes. Obviously, the strategies are all different, but really, when we get to the individual level, we've done all the business planning we can. We’ve made all those decisions. Now, we have to decide if there is excess funds.
Do we want to put them into the individual’s hands and allow him or her to accumulate assets outside of the business? Or do we want to keep investing in the business and use whatever strategies there are to reduce tax? It's never a question of what should the individual do, it's what should the individual do based on their goals.
People say to me, “Well, I don't want to pay off my mortgage because I want to keep my interest deduction.” That sounds right when you say it aloud, but it's not right.
You should be accumulating money, but you're paying taxes on the earnings on this other money. All you’re doing is offsetting the amounts and complicating your life. That's my philosophy. There's no right or wrong.
To me, for a business owner, it's always about what's right for the business. You need to ask yourself what goals do I have? Sometimes the choice is, I could either A) lower my taxes if I build another building, warehouse or buy a bunch of machinery or B) I could put that money back in my pocket, but end up paying more in taxes.
However, let’s say I’m 65, and I'm ready to retire in two years. The decisions I make are going to be different if I'm 45, and I want to keep investing for growth. So, it's unique. Every individual is different.
S: Do you think that a lot of times people fall back on this conventional wisdom about taxes and finances that may not necessarily be true, like the mortgage thing?
D: Nobody likes to pay taxes, but you have to make choices. If someone says, “I have a million dollars of income, and I want to get rid of my tax liability. What can I do?” I’ll tell them to pay a million dollar bonus to their employees, which they’ll say, “Are you out of your mind?” Well, you’ve got to find ways that make sense to reduce your tax liability. That’s what tax planning is.
S: I know a lot of times business owners start out with a CPA and then they continue to grow. Do you think that there is a certain point when business owners should be thinking about reevaluating their relationship with their CPA?
D: If they don't feel like they're getting regular interaction with the CPA. If the CPA is just getting numbers and putting them on tax return, then you're not getting tax planning. Yes, you'll get whatever things that can happen at the last minute, but that's not planning. That's existing and adjusting as you go along. Planning is: we want to get somewhere, how do we get there?
S: Is there a certain amount of time you think that a CPA should be engaging with a client? Like if my CPA contacts me twice a year is that good or bad? Is there a hard or fast rule?
D: Early in the year, you make a plan. You have a tax return from the prior year. You and the CPA should look at that return and figure out if it worked out the way you wanted and why. Then in the fall, you should be meeting to talk about how things are going throughout the year in regards to your tax plan. Once you know how it's going, you decide what you need to do going forward. Then you're back to the beginning of the next year and start over. The point is there should be a regular flow of information activity. That way, your CPA will be there to help you.
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Published on January 21, 2020