Business Of Business Podcast with SmartBooks Head Of Tax Greg Reed

Business Of Business Podcast Transcript

Recently, I appeared on the Business Of Business Podcast to discuss how business and tax strategy is an important year-round focus. Below is a video of the podcast along with a full transcript. All of this originally appeared on the Business Of Business Podcast which you can visit here.

Roy: Hello, and welcome to another episode of the Business Of Business Podcast. I’m your host, Roy. We bring a wide range of guests that talk about a lot of diverse topics, that have to do with business situations. And, today we have an awesome guests and not only a timely guest: Greg Reed, a CPA with SmartBooks.

They have a very entrepreneurial culture at their company. His roots are working with large and international business. Greg is no stranger to complex tax laws, which is what led him to work with small businesses because they often don’t have access to someone who can help them navigate tax law. So, Greg, thanks so much and welcome to the show. We appreciate it.

Greg: Thanks for having me, excited to be here.

Roy: Well, unfortunately, and I’ll be the first one to throw myself under the bus and say that, in my personal life and in business, we think about taxes on April 1st, April 7th or 8th, and rushing around trying to gather everything up and, throw it in the shoe box to take it over to the accountant and get everything put in. But, really, and that’s comical there.

I’d try to do a little better, but tax prep, there’s more to taxes, than just dropping numbers into some boxes. I think it’s a year long process and we need to really be in contact with our professionals, our CPAs, lawyers and other professionals that we work with every year, because, while you can help guide us and know where we’re at, but anyway, that’s kind of what I would like to talk more about today is, just kind of that the, all the other stuff that you can help small businesses with as well.

Another thing I want to make clear too, is even though that you’re located in Massachusetts, you do work with, clients all over the United States as well.

Greg: Yes, yes we do. We’re all virtual. And, now in this COVID era, I guess a lot more people are, but we’ve been like this for about 10 years. We’re pretty accustomed to working like this. Back to your comment about the shoe box, you’d be surprised there’s still a lot of shoe boxes running around out there. We try to and try to get people away from that.

Roy: Yeah. It happens, sometimes we don’t want to know what we don’t want to know, but then again, and that’s, again, this is kind of the importance of having a professional like yourself, maybe we don’t have you on staff, but I kinda, I look at you as more of a, a fractional, accountant for the company where that, we can consult during the year to make sure that we’re on track and that we’re doing things and you can also provide that guidance and advice as we go through, because it is so complex even for smaller businesses. It’s just, it’s not that simple anymore.

Greg: The best way to utilize me and think about me is as more of an advisor role than just the tax guy. I offer a lot more value than just the tax guy and only in April.

Roy: Yeah. It just, it depends on the businesses. Of course, COVID, I guess that, it’s not only presented challenges for the businesses, but I think there a lot of these programs and things that have happened throughout the year, that’s going to take some preparation and thought and planning to make sure that we capture what we’re supposed to capture, but we also are able to take advantage of the different breaks and areas that have come out in 2020.

Greg: Absolutely. Our whole team has actually done a ton of research. We’ve done a ton of reading. We’ve worked with a lot of our clients and helped them through, there’s PPP loans or Eid LL or, whatever, all the other incentives that they have out there right now, just to make sure that, we’re taking advantage of all that for all of our clients.

One thing that we did that, I’m very proud of and really helped our clients in my opinion, is when the whole PPP loan came out, we started right from day one. We started tracking all the expenses and how they’re used. We had all the receipts documented and bookmarked. When it came time to forgiveness, it was just like we had the summary, we had all the receipts, all that stuff. And it was nice and neat and made the whole forgiveness piece a really easy thing for our clients.

Roy: I know tax season is right upon us. What we’ll say is, let’s get through this tax season and then have a fresh start, with, reaching out to professionals like yourself because, we need to build that good foundation. I think that, and I’ll let you speak more to this, but it’s also talking a lot of things through, so you understand me, my business, my needs, it helps you more, the more knowledge you have about my operations.

Greg: So, high level, I really think about working with my clients is like building a house. We can kind of get into some more of the details of what that means, but, high level, it starts with building a nice foundation. So, are your books and records in good order? Can we take that shoe box and put it into QuickBooks online and make sure that we’re capturing all the expenses the right way? And then are we structured the right way? You might be an LLC, but how are you taxed? That’s a key piece.

You can save a lot of money making sure that you’re structured the right way. Then, you kind of get into the high level stuff, right. Or so, like electrical and plumbing, right. Like the essential stuff. We get into, I think of these as kind of the essential deductions, I guess, making sure that you’re taking the meals and entertainment and home office, you’re taking the, what we call accelerated depreciation, in the tax world, which is, either what we call a bonus or section one 79 depreciation basically allows you to write off assets faster for tax purposes than for book purposes.

Roy: I’m going to stop you a minute because talking about the structure, that’s an important piece that a lot of times we don’t think about. Sometimes we fall into businesses and we operate under, kind of that sole proprietor of doing business. That’s how we can do it here in Texas. You go down and get a certificate and for $7 or something like that, you get your assumed name.

The, and so it makes a difference, in our tax planning, but there’s also that the liability protection is once you grow and start having assets, the, being able to segregate and protect is very important, but then the more that you do that, then you have to start keeping up with expenses and you have to start worrying, pay more attention to what you can classify as the business expenses. I’ll let you, I know enough about that to be dangerous, but I do know that it’s an important factor.

Greg: The entity structure is key. I tell my clients all the time, if they’re just starting out, maybe a sole proprietorship is the best structure, right? It’s the cheapest structure. You can start up, close it down really easily. As they continue to grow, it does usually make sense to convert over to an LLC. It’s relatively cheap money. Then, how you get taxes and LLC like that’s kinda like the next step in that.

A lot of it also depends on your goals. Do you want to bring on investors? Do you want to keep it closely held or do you want to have more flexibility? Stuff like that. These are all conversations that I have my clients, so that we can set them up properly. I have a phrase it’s called, “never let the tax tail wag the dog.” What that means is that you can’t base everything on paying the least amount of tax.

You gotta set stuff up. It makes economical sense for you, right?

Roy: Yeah. I think the further we go down the road, the more complex it becomes. That, again, that’s why we need to reach out to professionals in the beginning, even though maybe we don’t change our designation, maybe we do, work under the assumed name for a period of time. We have triggers of when we know when it’s time to take that next step. I think the other part of this, and I think that’s just where you were going is, with our retirement planning, but also succession planning.

We have to think about, as a sole business person, you’re, even if you have four or five employees, you typically have all the knowledge of everything in your head. We have to plan for, unfortunately, what if we’re to pass suddenly, because we need to think about our families as well, about that succession planning we need, maybe at some point we’re going to want to sell, or we might get made an offer.

Roy: If we don’t have things, in cleaned up and we don’t have the back of our house cleaned up, that makes it much more difficult as well.

Greg: Yeah, absolutely. Yeah, setting all this stuff up so that, like you said, succession planning, do you want to pass the business on who do you want to pass the business on to, making sure that, if you have a partner that, you have a nice, buy, sell agreement in there, this is where I, I’m a big believer in building a team around you. As you continue to grow, you build that team. You have me, you have an attorney, maybe you have, an estate attorney to, help with the succession of wealth. My plan is that we all work together to come up with the best plan for you. I’m a big believer that I don’t know it all. I have no problem saying that. And I believe, and in utilizing experts,

Roy: No, I agree. I agree in, and it, this it’s complex and there’s a lot of moving parts, but it’s also, that succession plan. It’s also that, it’s some people, the business is their retirement plan. So, we need to think about how does that work. We don’t want to get to the end of the line. I’ve seen this with small businesses, they get to the end of the line and there’s really no business there to sell. It’s, it’s all the information is they are the assets.

Basically. They, the person is the asset. They step away, there’s really nothing anybody to sell. So that’s, something to think about. Also there are a lot of retirement vehicles that are, available to, business owners, small business owners that are really good vehicles in order to set some money aside just as a kind of a backup plan too.

Greg: Oh, absolutely. Not only, from, obviously it’s, it makes good financial sense to, save for retirement, but also from a tax planning perspective, if you are generating a lot of income, there are ways that we can, minimize or reduce that tax liability by, effectively, doing some retirement planning, whether it’s a set plan or a 401k, or, and again, that all comes down to structure size goals, stuff like that. Right. There’s really is no like one size fits all plan. And, and that’s why, again, getting back to looking at me as more of an advisor role than a, just the tax guy is in my opinion, very crucial.

Roy: Yeah. We need to think about this as a year long process, because, if our hiring, if I hire a new guy in June, because when we’re talking about retirement plans, there are a lot of rules and regulations. I don’t, we don’t want to get that minute into all of them, but some have to do with used to anyway, contributions that I can make to myself as the business owner or some plans you have to make the same contribution to employees.

Some you don’t, but these are all great things to talk about with you in June. When I add my employee, not April 7th, like, oh yeah, by the way, I added some guy, this last time and then, kind of get jammed up at the last minute.

Greg: I’m just a historian January to April. I’m a historian.

Roy: That’s a great way to put it. I kinda liked that because, we need that. You need to be an active participant. In June or July, when I’ve hired this person, we can make adjustments and things that we’re doing at that specific point in time.

Greg: Absolutely. I do a lot of tax planning with my clients, especially at year end, just to at the very least figure out, what your liabilities look like, make sure that you have enough cash available to pay the taxes. You know, plan accordingly for that. Some even going back to the retirement, right? Some plans you have to fund before year ends, and some you can fund up until, you have up until you, submit your tax returns. So, depending on what you’re, and that has huge implication.

Roy: Which kind of leads us into, well, a couple of things you had, on the, something that we probably want to talk about too, is, working out of your home for your business is a big one. From things I’ve read in the past, that’s probably the number one flag for audits, with smaller businesses too, when they show some God awful amount of.

I don’t used to, we take the square footage and wrap, you could wrap some other costs into that, but when you start overdoing it, cause there’s percentages that you work off of. Anyway, again, I’ll let you talk about that, but those are things that while they’re legal, he just have to be careful at how they’re presented.

Greg: It’s all about documentation. Making sure that you are able to build a strong case in the event that you do, get audited. And, as far as the home office goes, your kitchen table, that’s not going to qualify. Yeah. If you have a place that’s used exclusively for business, then there’s a few other, this is very high level, but, if you have a place that’s used exclusively for business, then the home office is a great deduction. People are often surprised at like what you can take, right. Again, as long as you’re not being aggressive, if you’re within the rules that the IRS have laid out for you.

Roy: Exactly. Exactly. So, what about adding children to the payroll? There’s a lot of advantages to that. Of course, again, we could probably do a whole entire episode, but if we could kind of go over the high level detail of that.

Greg: Yeah. I, I love this one. I did this with a couple of clients this year. You have kids, maybe you have like a 13, 14 year old that, you can pay it, to stop envelopes, sweep the floors, just stuff around the business to help out. You can pay them up to a $12,000 and they eat, they don’t have to pay they don’t have to pick up the income on their tax return. That’s earned income to them.

Why you sit in that to a joint bank account and that way, you’re pulling money out of the business. The business gets the deduction. It’s a, and they’re not paying the tax on it. So it’s a great incentive. Now some states, again, you have to be careful about, child labor laws, but typically if it’s your child, they kind of let you do whatever you want.

Roy: We didn’t talk about this. Don’t mean to put you on the spot, but the other thing is, like once they get into college, is there still some advantages too, if they can perform the work w they have to actually do the work. We have to be able to prove that they’re doing something, but they’re at one point there was also some really good advantages. If you had children in college, if you could work this out for them in order to, make sure that they had some money.

Greg: Yeah, absolutely. And, you can put them on payroll in college and, the rules do start changing once they hit 18 years old. But, you can certainly, there are, believe it or not, there are tax planning, ways that we can, save for college and, depending on the size of the business, the type of business and stuff like that, there’s opportunities there as well. So, again, it’s one of those situations where, it’s very specific to the business, but if you qualify for it, then yeah. Yeah, you can, we can save up to about 36,000 a year. Yeah.

Roy: So, yeah, that’s amazing. Again, I hate to belabor the point about, getting with professionals to talk about this, because there’s so many things out there that people just don’t think about. Then, I don’t know how many tax bulletins do you estimate that you get per year? That, cause that’s another reason why I was like, I have, my degree is in finance and I’m pretty decent with numbers, but I still use a CPA because she is up on everything, all the latest information and changes through the year that I don’t get all the tax bulletins.

And, they may not be as much as they were, but when I was coming through school, they used to, sometimes there may be two or three a month that would come out. Again, it’s staying up on the latest of like this, payroll for your kids and things like that.

Greg: I’ll be honest with you. I, I subscribe to a daily bolt and I get daily updates on things that change. And, it’s not just the federal level, you gotta think about state level and then you have the various taxes, right. You have income tax, sales, tax, franchise tax, you name it and there’s always something happening in some area there. Yeah, I have a daily update diary, more than others.

Roy: Another thing on our list of to talk about it. This would be more, I think, geared to people that are thinking about starting a business or people that may be very new in the business is the estimated taxes, because I will tell you that I’ve known some people that has really come back to haunt them, even though they had some success in a business, they just got so far behind that. It killed them. Might talk, touch on that for just a minute.

Greg: Oh yeah. Absolutely. Estimated taxes are our key and, you definitely want to avoid the, any underpayment penalties and you also want to be able to, make sure that it’s a great way to budget for the taxes due at the end of the year. Right. I think that some people, especially new business owners, maybe they’re really successful.

Then, they sit down with me and in April and all of a sudden, we have this $20,000 tax bill due and they don’t have any money set aside to pay it. That’s where the estimated tax is really coming into play. And again, there’s planning opportunities around that.

Roy: One thing I got into a habit, luckily, I got some very good advice at a very early age on this, but, whenever I collect money from a client, I just have a separate bank account for my, tax. For also my, for my SEP contribution. So, I can, again, talking to my professional, I know about what those percentages are every year.

What I can do is immediately pull that out and segregated and it doesn’t get commingled and accidentally get spent or invested in, believe me, it sure helps me sleep better at night. Number one, knowing when I have to make my estimated tax payments, I have something in there to actually send. At the end of the year, we may be off by four or $500, but we’re not off by tens of thousands of dollars.

Greg: That’s a great point. It’s definitely a smart idea to kind of pull the taxes out as we go. That’s why we kinda, quarterly estimated tax payments do the same thing, but, if you can kind of hold onto that money and it makes sense, and, you can, limit the underpayment penalty then, keeping in maybe a savings account where it’s working for you, is, definitely a good option.

Roy: Yeah, no, I went ahead and I just had the money there where I could make those estimated payments because it, again, I don’t, it’s not that I don’t trust the system. I didn’t trust myself if that money was already gone, then I knew it would be there. So, I’m gonna use it for something else. Exactly, exactly.

So, again, these are all strategies that, we seek out from our professionals because they can give, especially just starting out, we can have a laundry list of things that we need to do and things that we need to watch as we go through year to save us from, well, just having a big wreck here at, April 15th and then trying to figure all this stuff out, at least as we worked through this through the year, we can handle, the smaller situations and not lead up to a big one.

Roy: Kind of along those lines is our payroll, because if you are a business that employs people, you hold out withholding and FICA and all that, you have to send that money in at designated times, I guess, at the, I’m not sure if it’s the end of the month end of the payroll, but, back in the old days, what we had to do was you actually had to call woman key it in, through a system. It was very difficult. And, the other thing is, I don’t know, I ha I know some people that used to have a whole bunch of trouble with that, estimating it, and there are a lot of good services out there now that, I mean, you can be down to the penny, with your withholding and things, what you are sending you. Oh yeah.

Greg: I’m a big believer in outsourcing payroll. Just let a company that focuses on payroll, do the payroll. We utilize, vendors like ADP, Gusto and a few others. And, depending on which ones are really good fit for our client, is the one that we’ll go with. But, the fact that a lot of these payroll providers will file the returns for you. They’ll they’ll do the W2’s, they’ll kind of, take care of all the stuff that can often be forgotten. Right. And, payroll is one of those things that you don’t want to get behind. Right, right.

Roy: Yeah. Yeah, because I know there’s been, and this is prior to COVID, but there was a, a really successful restaurant here in town where I live that, they ended up getting in a lot of hot water over their payroll or their payroll taxes and eventually put them out of business. Again, I, everything in business is serious, but when you’re dealing with the government federal or state, they take this very serious. We need to make sure that we’ve got our ducks in a row, when we get, when we start talking about that. Absolutely. The different rules, I guess there’s different rules for states, with payroll as well.

Greg: Yeah. It’s, states all have their own rules. It’s like 50 different countries. So you gotta be up on that. Again, going back to my point of utilizing, people who are well versed in this stuff and live it, payroll is definitely part of that.

Roy: Then, which kind of also leads to, 1099 employees. I know they’ve made some changes in 10 90 nines this year, but I think the other distinction where you can provide some guidance on is, there, a lot of times people think that they can avoid the whole, with holding that mayor, if we just 10 99 people, but there are very specific rules around who is eligible for 10 99. I guess what I’m trying to say is that you can get yourself in some trouble by doing that, if things come back on you as well.

Greg: Yeah, and I think it was California that just recently passed a rule that it makes it pretty hard to be a 10 99 contract there. At the individual level at least, yeah, you really gotta be careful with the 10 99 and crossing that line into employee because, they can, they’ll hit you pretty hard for.

Roy: That. Yeah. And are specific rules. I know that. Again, I don’t want to get off into that, but this is why, you need to seek out professional help because there are like four or five key things that you have to meet in order to be considered 10 99. I think that they’ve gotten more and more difficult as we’ve gone through time. So, but let’s just say for a minute that, we have a domestic help, somebody that helps with children or cleaning the house, maybe the yard God. What, w what are the rules on that? Is it still like five or $600 if you pay somebody more than that?

Greg: Yeah. Yeah. It’s, it’s, $600 per, if you pay someone more and then, the child care is different. You actually have to put, if you pay over, I think the amounts $2,000, don’t quote me on that, but, you gotta, you actually put them on payroll. It’s, I believe it’s schedule H and Z. You have to set them up on payroll and withhold taxes, and that’s like a whole, it’s called the nanny payroll there. and, they’ll the bigger websites, like, they’ll kind of administer that for you. A lot of people don’t either do that or know that. Yeah. That’s definitely something that, you could get dinged on. Yeah.

Roy: Okay. Always good to reach out on that. Let’s talk about KPIs for a minute. What are some things that, I guess we can be looking at as far as our key performance index is either, jointly or what I need to be watching throughout the year.

Greg: This comes down to, and this gets back into, really understanding your client, understanding their goals and helping them identify the key performance indicators, the KPIs that are going to be meaningful to them. It also, it gets back to record keeping, if you’re running, several different business lines through one account, we want to make sure that we’re separating those out so that.

We know, okay, this side of the businesses maybe doing really well, but this side of the business and not so much, and really setting the key performance indicators that are going to beneficial to you, and then tracking them over time so that we can utilize that data to continue to get better as in the future. Okay. These are all things that, like when I meet with my clients on say like a quarterly basis, we’ll sit down and, go through, what the numbers look like, figure out what, how we’re doing compared to, budget to actual, figure out, how are we doing with the KPIs?

Greg: What do we need to do to maybe get to, back on track or, maybe we need to adjust our goals. At this point we’re not even in like to tax world anymore where we’re more in like that advisor role, but, my benefit or my advantage is that, I, I understand, financial statements, and not to say that our clients don’t, but, I think I look at things differently than, maybe say like, a typical business owner. Yeah.

Roy: Well, and I think we fall into a trap of, we’re so busy running our business that we, it’s not that we don’t pay attention. It’s just, we don’t really know what that is telling us because I’ve, unfortunately, I’ve dealt with some clients in the past that get down, to, they get well through, a year to find out that maybe they are taking a loss on some different segments, products or services that they have the business overall.

Like you said, this is a good reason to, try to segment as much as we can, because they had, one particular service that was dragging down the whole operation. Instead of waiting, till the end of the year, or going through your four years by tracking that were able to catch it, make some changes and put them back in profitability. Again, that’s important that we just don’t let this stuff go longer than it actually needs to go before we realize it.

Greg: And, it’s all about, building that healthy business that, like when COVID hit, a lot of businesses were doing okay, but then they realized, well, maybe weren’t doing as good as we thought were. Right. And, having it, tracking those KPIs and, the budget to actual and all that, planning is helpful in that. I mean, I’ve had clients who come to me and say that they’ve had a great year, and then we start looking into the books and diving into it. And, it turns out to be not such a great year. So, the customers might be there, but maybe the pricing isn’t.

Roy: Yeah, yeah, definitely. And, again, don’t want to get too far off track, but this is another area where, I’ve seen with clients in the past is that it was pricing. When you really start breaking down this pricing, they didn’t understand the components of what made that there’s an arbitrary, we’re charging this much for this service.

Unfortunately it wasn’t enough to cover the expenses for them actually providing that service. So, those are things that, professionals can help you with to look at your, think about looking at the market, the competition, a whole lot of things that you need to look at.

Greg: It goes the other way too. Right. Maybe use your thinking that maybe we didn’t have that great of a year. Yeah. Once you look at the numbers and you figure out what’s deductible and what’s not deductible, and, kind of get into that, you figure out why I might have this big tax bill. Right. Yeah, so it’s good to keep those that tracking on.

Roy: Track, right? Yeah, exactly. So, yeah. We mentioned, you mentioned this a little earlier, but the CPA financial advice is, part of a greater team that we need to look at building, and, you talk about the team that we need to try to put together to help us reach these new goals.

Greg: Yeah, absolutely. I like to say that you gotta start with a good CPA, and they’re kind of beat gonna kind of be the, if you want to say a sports analogy, I’m the quarterback of the whole stage of the whole process. Right. Even from day one, right, you just, you say, I want to start a business. Now, you reach out to a CPA. Okay. Let’s talk, what does this mean? What do you have to do?

Do you have to, with the state, do you need any specific licenses? and then, let me introduce you to this attorney and they can be set up the business from a legal standpoint. Okay, great. Now, let me set you up with a bookkeeper, and now you can get set up with a bookkeeper and, let me get you on a payroll platform that works for you, if you need payroll.

Greg: I’m, I, I view my role as more of like, a quarterback type role where I can, kind of oversee the whole operation from the finance side. Yeah.

Roy: Yeah. The other thing key for that is that communication between all of those people, there needs to be good Oak because it can kind of derail the whole process if all of these professionals operate in their own silo where they don’t really talk to each other, there needs to be a good team with good communication and get that set up from the beginning. Yeah.

Greg: Absolutely. The communication factor is key and, making those introductions to, if you already have an attorney in place, just making sure that, where we’re all on the same page. And yeah, exactly. I think that’s probably one of the factors that causes the whole house to come crashing down. Right. Is communication. Exactly.

Roy: Yeah. In most things in life that’s for sure. All right. Well, Greg, thanks so much. I know it’s a busy time of year for you. I just want to again, say thanks for taking time out of your day to be with us and talk this through. Because like I said, we view sometimes people view their, CPA is just the guy they see in April and, just go take that beating. But, I think the bigger message is that we need to look at our CPA as part of our team and we need to have contact throughout the year so we can get that advice.

And, it will definitely help us when the end of the year rolls around. We will be in a much better position in order to, get everything taken care of as well as be more profitable. Yeah. So, so what is a tool that you use either in your professional life or your personal life? It could be a tool, an app, some kind of a habit, a ritual, something that you do every day that adds value to your operation?

Greg: Honestly, from a more of a personal level, it’s just making sure that, I’m taking care of myself. That just makes me, a better person, a better, CPA and a much clearer mind. Yeah, you can’t work a hundred hours a week, especially doing what we’re doing. I always make a joke that you probably don’t want me doing your taxes on April 14. At that point I’ve looked at so many tax returns. It’s, it’s all starting to blur together, but, all right. Yeah. And that’s, self-care, we’ve got.

Roy: To take care of ourselves that’s for sure. The other thing I might advise people is just, call Greg.

Greg: Absolutely. We work with small businesses ranging from, pre-revenue startup to, anywhere, five to 10 million in revenue. We’re just looking to, like I said, be that kind of the advisor role that they might be missing. Again, we focus more on the tax planning for me, the tax return, which obviously we do is kind of the end result. Right. It’s like the presentation of the business plan, and working with me throughout the year.

That’s, that’s where for me, that’s where I’m going to provide you value. Yeah, small business owners, we, I’m a big proponent of keeping the businesses and the individual returns together. I often do the individual tax returns for, the businesses as well, all the owners. We do, individual returns as well. So, if you just need to get something filed, we handle that too.

Roy: All right. Good deal. Well, thanks so much, everybody y’all reach out to Greg, see what he can do to, be a critical advisor for your business and, just help you to be more successful and be more prepared. That’s going to do it for this episode of the Business Of Business Podcast.