Episode 170: Fireside Chat - The Value of Tax Planning with Mariana Mena

So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable? That is the question, and this podcast will give you the answers. I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting advisory firm for insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation. Check them out at club.capital.

Mariana, welcome to the Club Capital Leadership Podcast.

Thank you. Hello, happy to be here.

Excited to have you. All right, so we're going to be talking today about the value of tax planning. Now listen, for those of you that hear that or maybe saw the title of the podcast, don't turn it off. There is actually going to be some real nuggets in here. This is not going to be some boring thing, but it is necessary as a business owner to really begin to kind of think about the value of tax planning. So before we do any of that, I want to give you the opportunity to kind of give your background and kind of how it led you to Club Capital before we get into it.

Awesome. Yeah. So I went to school for accounting. I am a CPA. Decided to go towards the tax route just because As you said, it might be boring for some people, but it's actually just something that I really always liked. Um, 5 years ago I started my career. I was working mostly with corporations and partnerships, and what really called me about Club Capital was the ability to work with small business owners. Uh, I was so— I was working with these big partnership and corporations that I couldn't really relate to somebody in this tax return. And being able to actually have an impact on small business owners' lives is really, what do you call it?

Purpose.

Yes, it gives me purpose. Purposeful. Yeah. It's a good word. Yeah.

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Yeah, I totally agree with you. Uh, I grew up in a small business family myself, and small business has been a big part of my life. And, uh, I'd worked for a big corporation at one point in time, and it's just being a cog in a wheel versus, you know, like actually having an impact on, on people's lives. Let's talk first, big picture. When you think about tax planning, we like to kind of come to terms with things on the podcast. What do you actually mean when we say tax planning? What is it? What is it not?

Right. So it's taking a look at your year as it's gone by and budgeting possibly in a way for the future of that same year, right? And being able to say, okay, this is how much I've actually profited. You know, a lot of the times we see money coming out, we see money going out, but you don't really look at your bottom line, focus on your bottom line. That's really something that we look at at tax planning and saying So how much should I be expecting to pay for taxes?

Mm-hmm.

If I can be prepared, and is there anything that I can do to lower that tax liability? Or it maybe the way around, maybe you have been mindlessly paying estimated tax payments throughout the year, but hey, you're not actually profitable, so why are you giving money away to the government? That you don't need to be giving away, right? It's just being cognizant of what's happening with your business to be able to plan for the future come April 15th.

Yeah. Is it fair to say that I personally don't use the word goal a lot, but I will in this sense because I think it's universal. People understand. Is it fair to say that a good goal as the business owner is once you do your taxes at the end of the year to get to where you really don't owe money, but you're not getting money back? Like, it really is like within maybe a couple thousand dollars. Like, we're pretty close to break even, so to speak, right? We didn't get a huge refund of $10,000, $20,000 because therefore the government was holding on to our money, you know, but also we're not surprised by, you the $10,000 or $20,000 bill, right?

Yes, 100%. Um, and of course, there, as you said, and I just want to put it up there because this comes up a lot of times, it's like there is really no possible way of breaking even at zero. Um, so you, but you do want to be in that $1,000 range, and, and the way to do that is to tax plan. There's really no other way to actually be able to know how much your tax bill is going to be unless you sit down, look at your numbers and make some decisions.

Yeah. Yeah. So it's fair to say that tax planning is really not a once-a-year thing, right? So tax prep is whenever— yeah, like, okay, we got to gather all the stuff, you know, that we got to get to be able to do it. But tax planning is really something that ends up becoming something that you're doing throughout the year.

Right, uh, and, and it doesn't need to be a, a one call, right? Every, I don't know, every couple of months or every 2 months that you sit down. But once you do that one time, you also know how to prepare yourself as a business owner, right? So you might need your accountant, for example, uh, in at the beginning a couple of times to be able to know where you're at, and there then you can sort of be looking at it yourself and have a tax plan yourself. So then when you actually sit down with your accountant, maybe once a year, uh, you already have some sort of plan, um, in your head. What questions do I ask my accountant? What is my account? Or— and it is the moment that your accountant can propose new things that maybe you haven't been thinking about, right? Yeah.

Yeah, you know, whenever I had Peter on, and I've shared this story as embarrassing as it is, you know, the first time that I really made a profit, $32,000, $33,000, and I had like less than $1,000 in my business checking account, and he said, you owe $9,000 in taxes. I could not wrap my head around that. I was like, I do not get it. This makes no sense. I have no money in my checking account. You tell me I owe taxes. Screw this. Like, this makes no sense. Like, I don't get it. But that was my big shock. And so I can totally relate to people who, you know, you know, early in your business career, you just don't understand these kind of things. And I didn't understand how profit and cash— and now what we're really talking about today is taxes. Really kind of all goes into play with that. Yeah, I'm sure you've had that experience with others.

Of course. Yeah. And it's— and I always ask that question in my tax planning calls. It's like, hey, you know, you're, you're making a lot of money. This is really nice. Do you feel it? Do you actually feel like you've been profitable like this or 'Cause really that question comes from how are you budgeting yourself and your personal life, right? Are you overspending? Are you even thinking about the money that you're spending and doing something smart about it, like saving a little bit for taxes? Even if you're not paying estimated taxes, are you saving to the point where you feel like you've actually been, in this case, $30,000 profitable or $150,000? You know, whatever it is.

Uh, I'm kind of a structure process person, and so we've had Mike Michalowicz, who, you know, wrote the book Profit First, and he recommends, uh, creating— one of the accounts he recommends is a tax savings account, uh, as a business. What are your thoughts around that, and what is a good best practice maybe on a monthly or quarterly basis of knowing how much money to be able to put into, to that account so that when quarterly estimates come around or when tax time comes around, you actually have the money in the account to do that.

Right. So I do like, love that idea of having a tax savings account just because you don't touch it, right? If you mix a savings account with another account, then you're not going to notice how much you're actually spending and how much you have set apart, right? Uh, as with every tax question, it depends how much that amount should be. Um, we generally say $20,000— 20%, sorry— uh, just because it's a good number, but, uh, it really depends on your effective tax rate. It also depends if you're a sole proprietor versus an S corp, just because as an S corp, if you're on wages, right, you are paying taxes through the year. Sole proprietors pay— and I don't know how specific you want me to get right here, but it's not— when you're a sole proprietor, you don't only think about your effective tax, your taxable income, but also your self-employed taxes, right? So it's 15.3% right off the bat for your profit, and then additionally whatever your income tax rate is. Um, so we might say 30% for sole proprietors instead of 20% like for an S corp, but ideally we look at your prior year tax return, we determine what that effective tax rate is for you And that's the amount that I would tell someone. So, and total tax for people listening here, total tax line in your return divided by your taxable income line, and that's your effective tax rate for the year.

Mm.

Yeah. And so much of that has to do a lot too with the other factors of your situation. Does your spouse work? Are you married? Do you have other, you know, do you have things, children, a mortgage, etc., that gets down into your personal return and ultimately how your business returns profitability moves over into your personal tax returns, right?

Right. Yeah. And that's For sole proprietors who, for example, for your example that you owed $30 grand, I mean that you owed $9,000 because you profited $30 grand, maybe at that point you didn't have taxable income and your tax income was zero, but you still owed that 15.3% of self-employment taxes, which really hurts at the end of the year.

Sure. Yeah, I, I think also too, really specifically, I mean, this, this, you know, realizing that people listening go from fairly advanced in their understanding of financials all the way down to super basic. I didn't even really understand until much longer that I actually pay taxes on the profit of the business, you know, that part of it. It's like, oh, wait a minute, so I, I had $100,000 in profit. I don't You— I thought you used a great word earlier.

It didn't feel like that.

I didn't feel like I made $100,000. Like, no, I felt like I made, you know, $5,000 or something like that.

Yeah.

So many people, uh, see— being small business owners, uh, how do you separate your business, which is your life, from your personal life, right? That's the thing that we see. And so your income, your profits from the business are essentially how you live, or, you know, whatever is left over from your business expenses, that's the money that you have to live your personal life. That mix, or that lack of separation, makes it so that you don't realize how much you're actually profitable, because this is the— this is your life. Your agency is your life. You're a small business owner. This is what you do.

So we couldn't talk about tax planning, Mariana, without actually having a conversation around. All right. So we get— I have a tax planning call. I'm looking at it for the year. I'm going to owe $10,000 in taxes, man. I don't— I don't want to write a $10,000 check to the IRS. That's the— that's the last place I want to be able to write that check to. And whatever that number is, $5,000, $20,000, $50,000. What are some of the things that you look at if you're having a conversation with someone on ways to legally be able to reduce the tax burden that I'm feeling?

Mm-hmm. Uh, so awesome question. Uh, something that we need to understand is that in order to reduce our tax bill, we need to spend a little money. And sometimes that may mean that you are spending $20,000 to save $6,000. And it's just a, a way of shifting your mindset of, yeah, maybe you still owe, uh, $14,000. Well, no, in your case it was not. Well, let's say that you still owe an extra $5,000. So you actually spend $20,000, but you still owe $5,000 in taxes. But you are using that money to invest back in your business, right?

Yeah.

And it's just looking at it as an investment. A lot of people love buying a vehicle because who doesn't like a, you know, shiny new car? That's even without me having to suggest it, that's literally the first thing that everybody asks me, how can I buy a business vehicle? Please, can I do that? And they know that it's 6,000 pounds, that the vehicle needs to be over 6,000 pounds. And then I ask you, right, so what is your business use? How much do you actually use your vehicle for business purposes? And I explain what business mileage actually means, commuting doesn't count, et cetera, right? We get into, okay, so what percentage do you think that vehicle business use is? 40%? 60%? Okay, cool. So hey, 60% of the cost is actually deductible to you, etc. So when it's something shiny like a vehicle, people are super pumped about that. They'll definitely go and buy a new vehicle tomorrow, right? Literally, you'll tell me, I guess I need to go to the dealership today. Uh, and they don't really realize that they're spending, you know, $80 grand, $60,000, much more so in this time of— that we're living, that vehicles are so expensive. Um, and that seems like a good investment to them. Maybe some other things like, uh, you need new furniture for your office for next year, you were planning it. Hey, do that this year. Take the expense for 2022 so that it lowers your taxes. And so long as it's something like that, that they look at it as an investment for themselves, putting their child on payroll, you know, they get to keep that money in the family, um, that's something that people are willing to do, even if you're only saving $6,000 on taxes by spending $20,000, $30,000 etc.

Is also to— one thing I've heard before is looking at some things to pull forward normal expenses that you have throughout the year. Let's pull forward those expenses in 2020. Well, in this case, 2022 going instead of 2023. So for instance, something like if we rent, maybe you go to your landlord and say, hey, I'll pay 3 months of my rent ahead for 2023 reduces the cash. Now, granted, this is all— you've got to have the cash to do it, right? This is a—

right, exactly.

You're sitting on the dry powder in the business to be able to do that. You could go to lead vendors and a lot of times at the end of the year they want to get that cash upfront. So they may be even able to do some matching with you to where you get a benefit. I'm spending $1,000 a month, $2,000 a month, I'll go drop $10,000. That immediately, those, that increases my expenses, which decreases my profitability, which then decreases the amount of taxes I have to pay. Can you just speak to maybe pulling some of those forward into this year?

Yeah, for sure. Always. Something that we recommend. A rent is an easy one that comes up quite a bit. And it just comes from the fact that if we're meeting now, let's say that we're meeting in December and we need to lower this tax bill. These are some quick and easy things that you can do. And sure, it's not an expense that you're going to have next year, but you actually have a year to do the same thing, right? Or to front load other expenses. For the year after. And this is something that you can do every year. It doesn't need to just be a one-year thing, right? So it's December, we're in a time crunch, let's figure out how to reduce that. And then we have all of next year to come up with how to lower that liability. Or, hey, this is the strategy this year, let's use another strategy next year.

You know, I was just thinking business is really hard. I mean, let's be real, business is hard and it gets harder. And there's so many things that are unknown unknowns. I mean, things that we just don't know what's going to happen in our, in our local communities. We don't know what's going to happen personally. We don't have crystal balls. We don't know if it's going to happen economically. There's all this speculation of what's going to happen with tax rates and etc. Point is, we don't know. Therefore, there's only things that we can do to try to have no surprises. And that's, I think, one of the biggest things that you're trying to get across is, hey, get to the place to where you don't go in with big surprises. If you're getting a $50,000 refund, it's kind of a surprise, right? Yeah. If you have to— if you owe $50,000 and that is completely like out of left field, you had no clue that was going to happen. It probably doesn't have to be that way, right?

Yeah. And you can owe $50,000, but if you knew that you were going to owe $50,000, you were probably preparing for it, right? So that makes such a huge difference in the mindset. If you find out in October that you owe $50,000 and, hey, actually, I don't really need to spend on anything. I don't need to lower that tax bill. That literally is just my tax bill this year. That's okay. That's also fine. You will owe taxes on your profit, right? So you have a couple of months now to actually prepare for that tax bill.

Well, people are going to kill me if I don't ask this question. What is one of the most maybe over— other overlooked tax saving, you know, hacks? That's the word I was looking for. I need a hack. Mariana, at the time of this recording, the, the episode we just dropped last Wednesday was on the Augusta Rule. So we talked about the Augusta Rule. So obviously people can go back and listen to that episode if they want to know more about that. But you got any other ones?

Yeah, I mean, retirement savings. When you are a small business owner and if you're new, right, this is most— this mostly happens to new business owners rather than more tenured ones, but you're not really thinking about retirement. And how am I gonna think about retirement if I don't even feel like I made $100 grand, right? Like, how am I— I don't have the money for that. But it's all about budgeting. It's all about looking at your income and seeing where you're spending and where you could be spending instead. Maybe. And even as sole proprietors, you're allowed self-employment plan pension plans, and you can lower your income today, right, by putting money away for retirement. I think that's a huge one. If you're an S corp that hasn't considered a 401(k) or a simple IRA, hey, you know, that's a way to even increase your wages to fit that percentage that the IRS wants you to pay yourself, but not actually having that as income on your return. Right. Because you're deferring that income towards retirement and investing for your retirement.

You know, I just wrote down at some point in the future, I think we need to talk about have an episode on if you're an S corp, what should I pay myself? Right. What should I pay myself? I'm going to— I'm going to— I'm going to talk to the team about that one, about just doing an episode just on that one. On that one thing. I just want you to at least comment because I think it's important. There's somebody— I certainly am not going to mention who it was, but somebody I know, S corp, was paying himself a very, very low salary, grossly low salary. And that's not my question. Got another part, another question. And then, you know, had had a good year, profitable, six-figure profit, and then did all kinds of things, did all the things that you just mentioned, but then started doing things where it's like, that is really pushing the envelope. Okay. I mean, we're venturing into like red zone here of you can— you do it fine, but you get caught with that, there's no way that that is going to fly. Can you just speak to Hey, like, it's just not worth, you know, getting on the bad side of the IRS to do certain things that are going to get you in trouble.

And when you say getting in trouble, you mean that low salary?

No, specifically not. That's one aspect of it. That's one aspect of it. And that's why I put that disclaimer that we do need to have a whole conversation around, hey, what do I actually need to reasonably pay myself? You know, we'll have that conversation another day. More so, that was just one of the things he was doing to try to not pay taxes, period. I'm talking about doing things to just lower the tax burden to where it's like, wait a minute, you went from— you went from owing $20,000 to getting a $20,000 refund. Like, I don't know if that was actually the right thing to do there.

Yeah, and I think that is what I was trying to get at earlier, where it's maybe you owe $50 grand and that's okay. We owe taxes. That's just part of the society that we live in, right? Uh, and if you owe taxes, that means that it's because you're making money. Uh, and we always wanna be reasonable. Especially with the IRS, because the IRS, you have 3 years to get a refund back from them. If you have a refund from 2017 right now and you didn't claim it, you can't get it. But the IRS can literally go back however much time they want to get their money. And it's not just their taxes owed, it's also penalties, it's also interest, it's also jail time. The consequences of not paying what you're supposed to pay are too high to actually, you know, do these things that— and being a small business owner is— you have so many benefits of things that you can do. And I think that's where people get hung up on. It's like, I need somebody that is actually showing me all these strategies that I'm not missing out on anything. Yeah, it's being reasonable and listening to your accountant and listening to your CPA and understanding that it is okay to owe taxes. If you owe taxes, it's because you're making money.

Yeah, that's right. That's right. I can't— I'm not going to— I don't know if I should put this out there, but there's a, there's a rap song by 2 Chainz. Yes, somebody is going to text me that I can't believe I just quoted 2 Chainz. But he said that he was talking about, I think it's called like Uncle Sam, or maybe called Sam or something like that. And he's talking that he said, I was complaining about paying taxes, and he owed like $2 million in taxes. And he said he was talking to P. Diddy. This is a real song, okay?

Somebody's going to go like this.

And P. Diddy said, well, I owed $100. And he said, that's when I knew I needed to play a bigger game. So anyway, somebody look up that song, okay? Like, oh, wait a minute, you owed $100? Okay, wait a minute. Now I need to get off my butt, you know? So anyway, all right, last question. Somebody has a tax planning appointment with you. I can't believe I just put that on the podcast anyway. But they got a tax planning appointment with you. What are— what— just real quick, what's a few things that they need to have prepared to be able to make the best use of their time to make it effective?

So specifically through Club Capital, but just in general as well, to have your financials up to date, right? Do you have— you provided everything for your accountant whatever that is, to have a successful tax planning call. Because if we're missing, you know, credit card statements, for example, that's huge. That's going to— we're going to overly state your tax bill, right? As well as any missing income that we have, other sources of income, not just from your agency or from your small business. Are good to have. Latest pay stubs, latest P&L for a rental property, you know, things like that are just as much information as you have for me, even though it's October and I don't need to think about this till April. You know, it's— that's the point. That's why we're here to think about those things, actually project, and be able to not have any surprises.

That's good, Mariana. I've learned a lot today, and I know that others have. Appreciate you coming on and serving our listening audience. Hope to have you back on in the future.

Thank you. Thank you so much.

All right, there you go.

There's some really great reminders for some of you. You may be in the habit of doing this. You know the book— I was just talking to somebody about this earlier today. It's E-Myth, you know, it's almost like required entrepreneurial reading at this point. And he talks about working on the business, not in the business. I just think that this is one of those things where, yeah, it is a necessary evil. And not thinking about taxes at one time a year, March 15th, April 15th, I got to get these maybe twice a year, personal and business taxes, tax returns. But really is something to be able to to look at, and it's not take— it's not going to take a ton of your time if you're on top of it throughout the year and not just waiting and putting it off. Then this is something that actually can be a good experience for you. Maybe not the process of doing all that, but it's not something you're going to, you're going to get through and have all these big surprises. And so for some of you, hopefully you learn some things and that served you. And for others, hopefully those were some great reminders for you. All right, everyone. Hey, big thanks to our podcast sponsors, DirectClicks, Club Capital, Autopilot Recruiting, and Coach P. I've talked to a lot of people. They're going to be loading up ready for a big 2023, and they know they need to staff up with great people. And some people want to be able to build a bench, and they've had amazing experience with Autopilot Recruiting. Make sure you use the code CLUBCAPITAL when you go to auto—

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When you get those team members on, you got to be able to, to develop those team members at a high level, and you want to be able to know how are they getting it done at such a high level. In David's office, he's got— he's one of the few that has 3 agencies that he's running, and to have a team that size, you look— you're going to have to have recruiting on a regular basis, but you're going to also have to develop them on a regular basis. Well, would you like to ever have a peek behind the curtains? That's what exactly David and his team give you twice a week, every single week. Look, you know, you can't outsource everything. You can't outsource the vision of your business. Only you can do that. But you can outsource the recruiting. You can outsource the development of your team. Go to coachpconsulting.com. Don't forget, David said that you get your entire first month off to give it a trial. You'll see why he's the fastest growing coach out there for insurance agency owners. You know, we talked about, uh, actually on that podcast with Mariana, investing, pulling forward some expenses in 2022, this year, from what you would do in 2023. And maybe that's leads, maybe that's time for you to invest in pay-per-click, uh, your Google SEO, you're finally gonna stop trying to do it yourself or haven't had a good experience with somebody else, or you just have not pulled the trigger yet, go to DirectClicks, directclicksinc.com. And of course, if you are not using Club Capital to manage the financials in your insurance agency, go to club.capital and book a no-obligation demo. This is the perfect time to begin to look at switching from either you trying to do the books yourself to actually having someone that is professional and is going to keep you up to date on a regular basis. Obviously you want to have regular up-to-date financials. Exactly what Club Capital was built on, but they are way more than just a CPA firm. All right everyone, till next episode. Hope this served you. If it did, would you consider giving me a review? On Spotify or Apple, or sharing it with just one other person, other one. Till next time, lead well.

So the big question is this: how do small business owners like us grow our leadership, develop our teams, and scale our business in a way that allows us to get our products and services out to the world yet still remain profitable? That is the question, and this podcast will give you the answer. I'm Bradley Hamner, and this is the Club Capital Leadership Podcast. Hey, before we get into today's episode, did you know that Club Capital is the largest accounting advisory firm for insurance agency owners in the country, providing monthly accounting, CFO services, and tax preparation? Check them out at club.capital.