Wealthy & Wise – Tax Tips

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December 7, 2023
Author: NCH

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About the Video

In this edition of Wealthy and Wise, host Cort Christie, CEO of NCH, is joined by tax expert Shawn Olson to explore crucial insights into tax strategies for individuals and small businesses. Covering upcoming federal tax changes, vehicle expenses, retirement planning, and new regulations on issuing 1099 forms, this episode offers practical advice for navigating the complex world of taxation. Whether you’re a business owner or an individual seeking financial optimization, this conversation provides valuable tips to empower your financial decisions. Subscribe for more insights and take control of your financial future! For personalized assistance with business entities or taxes, contact NCH’s team of dedicated consultants.

Prefer to read? A full transcript is provided below.

Cort:

Hello and welcome to another edition of Wealthy and Wise. I’m your host, Cort Christie, CEO and founder of NCH. Today we’re going to be talking about taxes, our favorite subject around here because we love helping people reduce the amount of taxes that they pay. And with me to break this down, I’ve got an expert in the field of taxation. I’ve got Mr. Sean Olson, who’s a partner at Business Tax Solutions. Sean, welcome to the program today. 

Shawn:

Thanks, Cort. Appreciate you having me on again. 

Cort:

Absolutely. And we’ve always had fun every time you come on. 

Shawn:

It’s not the sexiest topic, I will admit, but we try and have a good time while we’re doing it.

Cort:

Well it’s a topic near and dear to everyone’s heart, especially small business owners who are trying to figure out ways of reducing their tax burden. And you’ve come in with, I see a healthy list of changes coming that all of us need to be aware of when it comes to taxation, that we will be paying more taxes next year. Many situations. And then what are the changes that are taking place with state taxes, federal taxes? I think we’re going to focus mostly on federal taxes today. So all of you tune in here. Listen up. Why don’t you kick things off and tell us what’s coming down the pike for next year.

Shawn:

Thank you for such a warm lead in. I sure appreciate that. Court. Obviously taxes is, as I said, not the sexiest topic, but it is really important. Obviously, it’s the number 1 second behind only your payroll in most cases is the in fact towards taxes it comes for all of us.

Now, paying taxes isn’t necessarily a bad thing, of course. There are just obviously better ways to spend your money more on a voluntary basis. But we obviously here at business tax solutions want to make sure that you’re paying the minimum amount of taxes legally required and not a dime more so you can generously donate your money other ways.

But that being said, so it’s just really important. It’s an important topic to keep your eye on in business being the second largest expense that you’re going to have in most cases. Now, when it comes to taxes, it should be a driving force, never necessarily the primary driving force, but it’s always important to understand the repercussions that come from things.

But the beautiful thing about taxes, double edged sword. It’s constantly changing depending on who’s in office and what their agendas are. And frankly, how those taxation points will affect them is usually what it comes down to. So obviously some things to keep in mind. Now, when you’re dealing with individuals versus businesses, there is a lot of advantages when you are a small business to obviously incorporating, and I know that’s a big part of what NCH does.

We’ve been working with Nevada corporate headquarters for a long, long time, so we appreciate and we understand what your clients are trying to do after your team has expertly structured the businesses and we pick them up. From the tax standpoint, obviously, understanding where and how these things are affecting your business is important because everybody’s different.

What we talk about one particular topic might not affect you. And I’ll give you an example on that. Car mileage. Obviously, somebody said, hey, I would like to deduct my vehicle. Vehicles are important, obviously, if you’re a business in most cases, but we want to make sure that there’s two ways to do it.You can choose as a business owner whether you want to do actual deduction as far as or actual expenses with relating to gas. Fuel. Obviously, fuel and gas is the same thing, but oil. Oil changes maintenance on the vehicles and wear and tear on said vehicles. So we want to make sure that obviously, we pick the one that works best for you. In most cases, when you’re first new business starting out, you want to make sure that you are tracking those miles. Very important. Obviously, every deduction that you don’t keep track of, it’s like throwing money on the ground. So you’re missing money. We don’t want you to do that. 

Cort: 

Sean, have you ever broke it down? Is it better for an individual to charge mileage or charge all actual expenses? They’re kind of a rule of thumb. And also, then the question is, if I own a car, but I have a business and I use my car for business purposes, I can charge the car these expenses, or I could actually have my business buy my car or lease a vehicle for me.What do you recommend? 

Shawn:

It really and again, it depends on the individual, the individual business in your particular situation. Most cases, you’re starting out, you’re using your personal vehicle for business purposes. So you want to make sure that you track every mile that you’re driving on behalf of your business, because if you’re not, well, you can’t deduct those at the end of the year. The IRS, if they came in and did an audit, they want to see your log, they want to see where you went, what the mileage was and what it was for. So if you don’t have a vehicle specifically set aside for business purposes, you definitely want to track mileage. If you have a fleet of vehicles, you actually will be doing actual mileage at that point, if you have a fleet of vehicles. So again, depending on your business, but most cases, in this case, for example, in 2023, you have 65.5 cents for every mile that you’re using for business purposes, is in fact, deductible, which is great. Now, that varies every year depending on gas average prices. So sometimes they actually change it halfway through the year. Last year in 2022, they actually had a part of the first year was on one rate and the second part was at a different rate. So somebody simply saying, I had 5000 miles, that didn’t actually work because we had to know, well, how much of that was the first part of the year and how much of that was in the second part of the year. This is where a mileage log comes in handy. And I’ll give you a little piece of advice. We’ve talked about thinking about this before. There are apps out there that make this so much easier than having to pick up a tablet and track it that way. Mile IQ is a great one. It tracks both mileage, and it takes pictures of receipts for you as well. 

Cort:

Mileage IQ does the mileage, and, like lunch receipts, purchase receipts, other types of receipts?

Shawn:

Well, as far as Mile IQ specifically is just for mileage. Okay, I was going to clarify that. So Mile IQ is just for mileage. Now, if you want to do also receipt tracking. So if you are, in fact, using it for going to lunch, you’re taking clients out and things of that nature, you want to take pictures of those receipts. We all know what happens when you leave a receipt on the dash in the middle of July here in Las Vegas. Anyway, it turns to a nice shade of charcoal, which makes it very difficult to then go ahead and read. So it uploads that to your email so you can keep a copy of that. In a lot of cases, they import into Quickbooks. So it makes it much easier for the person who’s doing the bookkeeping to keep track of those expenses. And at the end of the year, prints up a nice, clean mileage log, you turn that into your account. And then we would take that and then use that as a solid deduction that would withstand any type of an audit as long as it’s all justifiable for business purposes.

Cort:

Fantastic.

Shawn:

 So, again, to make the decision whether I should in fact do it as far as actual miles, or we should just simply take the per mile per diem that they give you, if you will. It’s a per mile charge really just depends on how much your business is. If you have employees that are taking your vehicles out, you’re getting a business insurance policy, things like that, or you’re just simply using your personal vehicle for the occasional jaunt. That’s where you would really want to track the mileage. 

Cort:

Got it. Fantastic. Good point. Mileage. Important to get your reimbursements from your business on your car and your vehicle. And think of all little things, as Sean brought up, could be oil changes, could be car washes, but you have to choose whether you’re going to go actual expenses or just take advantage of the simple mileage deduction. All right.

Shawn:

 A lot of times people will, in fact, do both until the end of the year, and they’ll make the decision at the end of the year, but you must stick with it on that particular fashion. So if you are doing actual, you stick with actual going forward. So again, first year clients, people who are just getting their businesses off the ground, using the old grocery go getter for those business needs, are usually the easiest way to do it. Make that decision later on to purchase additional vehicles. Which leads me into, obviously, the clean energy vehicles. EV is something that’s been a big topic. A lot of people, you see them on the road, they’re purchasing these vehicles for their businesses and such. There are some tax benefits right now as individuals. So as far as EV is concerned, $7,500 as far as tax credit that you can get for your EV vehicle this year, which is great for 2023. That’s very helpful. But you got to keep in mind that there are phase outs. They’re trying to make sure that it’s beneficial to middle America, not just the super Elite. So if you do have, obviously, your AGI, your adjusted gross income is going to be at least under $300,000 if you’re married, filing joint. After that, if you do hit that mark and above, unfortunately, you don’t get that deduction.

So it’s unfortunate, but there it is. But it’s also not refundable. So if you do get that tax credit, if you own no taxes, well, they’re not going to cut you a check for it. It takes it down to zero and it stays at zero. So some things to kind of keep in mind, but yeah. So let’s talk about as far as your business is concerned, when it comes to generally active trader business, whether it’s landscaping business or whether you’re flipping real estate, you’re buying and selling, wholesaling, rehabbing, you’re swinging a hammer. You’re yanking carpet. You’re doing an active part of the business as an LLC. The IRS is obviously the best tax structure in most cases on that is an S corporation. LLCs by themselves, they can be taxed many different ways. As you well know. They’re basically chameleons. As far as the tax goes.

Yeah, there really is no tax code for an LLC. It has to be taxed as something else. So generally speaking it’s either a single member LLC which kind of defaults back to almost like a sole proprietor situation. It just goes on your schedule C or if it’s a passive income, goes on your schedule E. But as far as the S corporation is generally the best vehicle for the active trader business, so really is it active or passive? It all is balanced on your level of involvement in the business. So again, to keep that simple s corporation in most cases for active trader business. But one of the perks and one of the things that IRS does require you to do with an S corporation is pay yourself a salary, a wage. If I were to hire somebody to do my job, and I know I might think of myself a little more on the expensive side, but if I were to have to hire somebody to do what I do for my business, what would that be?

As far as the IRS is concerned, they kind of use that as kind of a gauge on what you would be paying yourself as now a W two employee. And that means what? FICA, Medicare, Medicaid, payroll quarterly, all that fun stuff. But the plus on that is, and this is the beautiful part, is that it helps save on self employment tax. Obviously the 15.3 self employment tax on FICA, Medicare, Medicaid is really important that you do that once your business starts showing profit. I’ve seen some people unfortunately that have come in, they’ve had several years where they hadn’t paid themselves a salary. What the IRS can do is they can come in, they can revoke the S election and take it away. And now everything was subject to that 15.3 self employment. 

Cort:

So very important if you want to be an S elected entity, which we generally recommend for most of our clients is pay yourself a salary. That’s number one, doesn’t have to be a huge salary, but you need to pay some kind of salary. That means you need payroll set up. It’s got to be done properly. 

Shawn:

Absolutely, most definitely. Because again the alternative is they’ll Come in and do it for you and they won’t be as kind. And they being the IRS, which is a whole bunch of no fun love you guys out there. In case the IRS is watching. Just kidding. But no, we appreciate, obviously, it’s important that you pay taxes. Tax, as I was saying, is it’s important because it means you’re making money in most cases, unless you live in California, then you have the minimum franchise tax, $800, which, of course, is a whole bunch of no fund also. But the idea is the goal is you’re making money, so they’re taxing you on what you’re making. So again, one of the benefits of the S Corp is it doesn’t pay self employment tax on distribution. So I’ll give you a quick little example. Let’s say you’re making $100,000 in profit. Now, when I say profit, this is what’s left over after all the expenses have been done, and you’re left with, let’s say, $100,000. And then you pay yourself a wage of, say, $30,000. 30,000 is now subject to the FICA, Medicare, Medicaid, it’s paying the tax over here. And now you can contribute to retirement based on this W-2 wage. This is what you quote, unquote, make per year. Now, the remaining 70 is to be taken as a distribution, as you can take as a shareholder in your S corporation. That 70 is not subject to the 15.3.

Cort:

 But you think about it, that’s significant. $70,000 times 15.3%. You’re talking about over $10,000 of tax savings in your wallet, back in your pot, basically, for you to use for whatever you need at home, advance the business operations, whatever you’re trying to do. So it’s significant.

Shawn:

Definitely. And as a matter of fact, both sides of the political aisle, they love to use S corporations. Joe Biden, when he was running for president, I think he wrote a book that made between 14, $11 million over a two year period. He was kind of beat up by his political opponents on the same side, even saying that he took advantage of the tax loopholes through using an S corporation. Now, again, you and I both know they’re not loopholes. This is tax law. He simply has a smart accountant, which is, of course, good. And he saved himself about $500,000 on his self employment tax. Now, obviously, we’re talking between four and $11 million over a two year period. So again, you can do the math on your side. You just move the decimal point over, but the savings are still substantial. 

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Cort:

You bet. 

Shawn:

Definitely, but it’s important you document things properly. When you do take, it’s not just writing yourself a check, as you were saying, you have to use a payroll company, for example, partner with the ADP. We use the representative through them, and they handle all that for you. They take care of the quarterlies. It can be a little, well, for lack of better word, can be taxing to have to monitor that on a weekly or a monthly basis and making sure the IRS gets its money.

Now, another part that I wanted to talk about, one thing that we’ve been seeing a lot this year is new business owners who are suddenly becoming successful. They’re doing really well with their business. Now, with COVID obviously, things kind of went down for a lot of businesses. It was really hard for America out there.

They kind of had to go into lockdown, and it was difficult to grow and start their new businesses. But some people thrived. That’s what you make of it. There were more millionaires that came out of the time of the Great Depression than any other time in US history. And that’s an important point to remember.

So COVID didn’t necessarily mean doom and gloom for everyone, but for those people who suddenly started making money they weren’t used to, they said, well, what am I supposed to do with it? Then they had to make these types of changes. Suddenly pay yourself this wage, and then tax deferral is a big part of it as well. How much can I contribute to retirement and therefore put off having to pay taxes on? The more you can put that off, obviously, the more your money can grow pretaxed and then you’re paying tax, hopefully at the later time of your life where your house is paid for, your kids are moved out, you don’t need to make as much money, so you can start pulling money out of your retirement and hopefully keep that in a lower bracket, thus receiving better tax benefits at that point.

Cort:

So what else can you bring up today, Sean, in the next few minutes that we have as far as what’s changing, what’s coming next year that people need to pay attention to in the tax code? 

Shawn:

You know. Great points. Obviously, there’s some changes that are just basic and inflationary. You’ve got changes to your contributions when it comes to 401. Your FSAs are still out there. As far as the flexible spending accounts are really great tools. If you don’t have one of those, check with your employer, look into those because those are a great way to cover out of pocket medical expenses that obviously everybody has. But again, doing it pre tax versus post tax. 

Cort:

Many people don’t talk about, know those FSAs, HSA accounts that can be available. When you own your own business, you get these same opportunities that if you’ve worked for any large corporation, that corporation provides you with health dental. You might get reimbursements for going out and going to the gym like we do at NCH. You can have an HSA account. Take advantage of all those extra fringe benefits for yourself, for your family, because it’s tax deductible to the business. But in some cases, some of this is just tax deferred or there are no taxes on it. In the case of an HSA account that’s paying know deductible medical expenses as well.

Shawn:

That’s very true. Very true. It’s just you have to utilize them and then sometimes that is difficult for some to do, even just simply contributing enough to your 401K. So you’re a company that is, a lot of companies match, some don’t. But you should find out for sure if your company matches. You definitely want to make sure you’re putting in and contributing enough to max out the contribution. So you not only are maxing that out, but you’re putting aside as much as possible. 

Cort:

And again, I’m going to bring it up for those of you that just are single member LLCs, hopefully taxed as an S elected entity. What you want to make sure is that you do have a retirement plan set up, even if it’s just for you, even if you own 100% of the business, there’s a huge advantage to taking some of that money that we talked about. In Sean’s example, if you had $100,000 in an S Selected LLC, paid yourself a $30,000 salary, had $70,000 left over that you could distribute at the end of the day, what if you could put a large chunk of it, 30 $40,000 into your own 401K program, match from the company, actually put in more than 40,000 if you completely match perfectly, and it’s a lot of money that you defer for your retirement that you pay zero tax on today.

Shawn:

Definitely. It’s important. That’s part of the tax planning to make sure that you are using those tools that are available to you. Whether it’s Solo K, for example, you can upwards, shelter and tax defer. Now notice I am using the words Tax Defer Court. Very important. Anybody that shoots out the elimination of taxes, usually orange jumpsuit stuff. Of course we want to keep everybody away from that, but the idea is to make sure that you sleep well at night knowing that you’re paying as minimum as possible to do that. But using the payroll structure that you just laid out with something like a solo K, I mean, tax deferring upwards of $56,000 per year, and that changes every year. Those go up, but you have to contribute enough on a payroll standpoint. So, again, those numbers will vary depending on everybody’s individual situation. But you’re 110% correct on that. Very important.

Cort:

 Absolutely. 

Shawn:

One of the big changes that I want to draw to everybody’s attention, I think it’s really important to be aware of, because this is going to affect a lot of middle, smaller, and mid sized Business and a lot of gig workers, people who are independent, just getting 1099s from individuals, they had made some changes. You might have heard about that, where they were reducing the threshold to which they were forcing individuals to report earnings. That was Basically, it used to be basically $20,000 and 200 transactions. If you were under those thresholds, you didn’t have to worry about reporting that they were going to do it in 22, but they moved it under peer pressure from everybody.

And I’m hoping everybody can start making noise about that with your representatives again this year. But that takes effect in 2023.

Cort:

Okay. You got to send 1099 to everybody you do work with. Who? Anyone you paid. At what amount? 

Shawn:

$600 is the minimum. 

Cort:

Okay, so $600 or more. Everybody you make a payment to, no matter what. Subcontractors, painters, people that are doing work for your business, you have to send them a 1099.

Shawn:

Exactly. And the main rub on this one is, let’s say, for example, you were to use the cash apps, Venmo, PayPal, all of these smaller cash apps that transacting money, I can go send it to you from my smartphone. Smartphones make dumb users. That happens a lot. But I take my smartphone and I send you $1,000. Let’s say I’m buying this beautiful limited edition coffee cup here from Nevada corporate headquarters. And this coffee cup was originally purchased for $2,000, but I sell it at a garage sale. And that person, you love coffee cups, clearly, that’s worth 1000. You take it off my hands for that and you wire me $1,000, I’m going to get a 1099K from the IRS, from the PayPal company that we use to make that transaction happen.

PayPal as well. Exactly. It is now my responsibility to say, now there’s things you can do about this, by the way. This is why I’m bringing it up. Keeping track of what was the original purchase price of this. It was $2,000. And again, some really nice coffee cup. But I have a receipt for the original purchase. But I’m selling it now for 1000. I’m selling it for a loss. I can show that, and I can show why I don’t have to pay tax on that. So I can do this.

Cort:

Track every financial transaction that you have. Very, very important. Well, we got to wrap it up. I know there’s a lot that you could go into. Maybe we have to have you back for more ideas to share with our audience here today. But I think one of the most important things that I want to share with all of you is that you have a short period of time in 2023 to take advantage of any tax breaks that are afforded to you and your business.

And most importantly, understand that these tax codes that we have here in the United States, every tax deduction that you’re able to take, you should be taking. It’s your money. You have every right to take every tax deduction that is afforded to you. And as Sean pointed out, you don’t go to jail for paying less in taxes. Maybe you go to jail if you cheat the system and don’t pay any taxes. That’s a whole nother matter. But you have every right to go out and minimize your tax obligations by taking advantage of the tax code the way that it’s written. And know that next year there’s plenty of changes coming.

But this year, this is the time to get active, look at what your tax situation is looking like, and take advantage of many of these things that we’ve been talking about before 2024 rolls around. So, Sean, thanks for being on the program once again, I appreciate your time. 

Shawn:

My pleasure, Cort. Happy to come back. 

Cort:

Absolutely. And for all of you tuning in to another edition of Wealthy and Wise, I appreciate you watching today. And know that anytime you need anything about forming a business entity or needing help with your taxes, feel free to call us at NCH. We’re here to help you.

We’ve got consultants that are willing to talk to you about your situation free of charge. There’s no charges just to call and talk to one of our great business advisors. So take advantage of that. Thanks for tuning in. I’m Cort Christie. Have a great day.

DISCLAIMER: The above material has been prepared for informational purposes only, containing opinions of the provider, and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. Please consider consulting tax, legal, and accounting advisors before engaging in any transaction.

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