Secrets to Slash Your Business Taxes

What I want to do is share with you the options that you have, because truly the greatest opportunity for you to have tax savings in your business as an entrepreneur, as someone who wants to be a wealthy entrepreneur, is that you can choose the structure that best fits your tax profile. Hey, this is Bob Govreau here, and I'm happy to welcome you to the Wealthy Entrepreneur podcast. Today we are going to be talking about one of the questions that I get asked all the time. And probably the most important topic I feel, that surrounds finances. And the question that I get asked is how do I pay the least amount of tax? Now, I'll give you a little bit of context. Years ago, back in 2016, 15, I had the opportunity to work with Tony Robbins. Tony Robbins, for those of you who don't know him, is one of the largest business gurus when it comes down to business coaching and ultimately like personal wellness and personal finances. And when I worked with Tony at his Business Mastery events, what I had an opportunity to do was discuss and identify opportunities for tax savings for his members. We would actually come in and we would request financial information. The attendees, which I think There are about 2,000 attendees, every time in his Business Mastery event, they would provide us with financial information. And the objective was to review the financial information and come up with ways that individuals and business owners specifically could save more tax. And one of the outcomes of doing a lot of these reviews was that 92% check that 92% of business owners were paying more tax than they legally had to. And I guess the question I want to turn to you guys today is, are you confident you are not part of that 92%? Because the majority of business owners really are paying more tax than they legally have to. So back to my question, Bob. How do I make sure that I pay the least amount of tax legally possible? So the first piece of this is really understanding how taxes work. So in Canada, in the United States, all across North America, we live in a marginal tax system. So what does a marginal tax system mean? It means that our income taxes go from 0% on our low income all the way up to, in the United States, 50%. In Canada, up to 58% tax rates, which is ridiculous. And it's individuals like me who help keep those tax rates down by doing a bunch of different things. And I'm going to share some of those with you today so that you can implement those in your own business. But what we need to understand there is that every individual from 0% up to 50 or 58% will pay tax at higher rates. So the more income you earn, the higher your tax rate will be. And a really good example is at about $100,000, your tax rate personally is about 30%, which is, you know, it's starting to get up there. It means that we're keeping essentially two thirds of what we make. And our objective, as you know, tax experts and professionals, is to try and keep that as low as possible. The other piece that we need to understand is that there's more than just individuals that have to pay tax, really. There's other structures, there's partnerships that have to pay tax, there's corporations that have to pay tax, there's trusts that have to pay tax, and in the United States, there's multiple corporations that can be set up. So what I want to do is share with you the options that you have. Because truly the greatest opportunity for you to have tax savings in your business is as an entrepreneur, as someone who wants to be a wealthy entrepreneur, is that you can choose the structure that best fits your tax profile. So let's talk about these entities. So the very first one, like I said, is you as an individual, typically as a sole proprietor. So if we're thinking of a small business owner, that sole proprietor is somebody operating as themselves. They are reporting their business taxes on their personal income. Again, anywhere in North America that you are an individual operating your business, you are providing that business income revenue minus expenses on your personal tax return, and you're going to pay tax at the rate of your marginal income. So again, if you're close to zero, it's likely zero percent, upwards of 50 plus percent if you're $200,000 of net income plus. So what we want to do is, we want to understand one, what are the other structures that are available to us? And two, when do we start looking at those structures and start implementing, you know, those strategies to move us towards lower tax rates? So the other, the other structures, partnerships, for example, are also considered that we're operating individually, just with more than one individual. So in this case, you know, I'm a partner, I've got a business partner. I do have business partners. We don't operate in a partnership. But Patrick is one of my business partners. If Patrick and I go into business together as a partnership, we claim that income split however we own it. So if it's 50, 50, or if I own 60%, he owns 40%, then I claim my percentage on my income tax return. Again meaning that you're subject to tax rates that go up and down. So the higher your income is, the higher your tax is going to be. Which is a little bit scary, right? Because for many of us as entrepreneurs, we, we aren't 100% certain on what our taxable income is going to be at the end of the year. And I'll tell you that so many businesses, especially in the infancy when they start their business, they don't realize that, oh man, I'm going to make a hundred thousand dollars this year and what are my tax rates? So now I'm upwards of 40% paying tax to the government when if we maybe considered something else, we'd be in a better position. So let's talk about the other structure first and then I've got some guidance for you. So the other structure that really comes into play is a corporate structure. So in Canada, in the United States, in Canada we've got just one type of corporation. In the United States there's a few different types and, and there's one that's called an llc, a limited liability corporation that ultimately you have an election that you can either have it taxed as a corporation or it can flow through to you as an individual. I'm not going to jump into what an LLC does where its benefits are, just knowing how it could possibly work. You know, you could fix it at a 20% tax rate according to a corporate structure, or you can allow it to flow through and you pay marginal tax again upwards of 50%. So you have an option there. There's also a C corporation in the US and that's more where the business just pays tax on what the business is earning and it's more around that 20% tax rate. So if our business taxes are higher than 20%, you likely want to look at that sort of structure or an LLC and elect it to be taxed as a corporation. This is something that you need to be aware of. Again, I'm not giving you this as guidance to say go do this for yourself today, but it's to open up questions with your advisors to maybe structure yourself better and create more tax efficiency. In Canada we have the one corporation and the one corporate structure that comes into play. And in Canada, for the first $500,000, we pay 12.2% as a Canadian corporation. So really great tax rate. You can see very quickly that there's a benefit to looking at a corporate structure to say, is my personal tax rate higher than 12.2%? If it is, I could lock it in, in a corporate structure at 12.2%. So I share these structures with you. So that you understand that there's potential opportunities to structure your business, structure your affairs legally so that you pay the least amount of tax. And that is going to be the number one opportunity for you as a small business owner is to find the structure that best fits the optimal tax strategy for you. The second piece of any type of business, you know, this is particularly focusing on a corporate entity. Again, if we move into that sort of structure, you've got a couple of ways that you can pay yourself. You can pay yourself a salary or you can pay yourself a dividend. And there are different ways. A salary tax rate is going to be higher to you as an individual. So you're going to be paying higher tax rates on a salary income versus a corporation paying a dividend to you. Your tax rate is going to be lower. Likely it's going to be lower by the amount that the corporate entity has already paid tax. So for example, let's say you're at $200,000 of income in Canada, 12.2% is your business tax. Your personal rate would be, let's say, 50%. Well, if you take a dividend out, it's going to be 50 -12% or 38% that you're going to pay personal tax on. So that's kind of, kind of how that system works. There's benefits to doing salary or dividends. Again, this is more a discussion to say here's opportunity for you to create efficiencies in your tax structure to make and pay the least amount of tax legally required. So the other piece I want to talk about is, okay, we found out we want to be a sole proprietor, we want to be a partnership, we want to be a corporation. How do we reduce our taxes once we've got the optimal structure? And I'm going to just share with you a little bit how these deductions work. So let's, let's take a US C corporation tax rate. It's 20%, for example. It's nice and simple for us. So a lot of people ask me, hey Bob, what do I need to spend my money on so that I pay less tax this year? And usually as a joke, I say me. Although for any of the listeners out there, if you want to send me money, I'm happy to get you a tax deduction. And I'm going to share with you how that works. But part of it might be working on your strategy and your optimization. We can certainly help there. That is a good investment. But for many people, when they say I want to spend More money because I want to get a tax deduction. If you spend a hundred dollars in your business as an expense, a deductible, legitimate expense, you are going to save $20 at a 20% tax rate. What does that mean? That means you've given 100, you're going to get 20 back. You're left with $20 in your hand. In the opposite situation, you say, okay, Bob, I don't want to spend money unnecessarily. What's the implication? Well, you owe $20 in tax and now you have 80. What would you rather have in your hand, $20 or $80? And for many business owners, the right idea is to pay the tax bill. And of course, you know, we want to talk about how we get that down as low as possible, and I'm going to share some ideas with you here. But the important piece is we don't want to just spend unnecessary money to get a $20 deduction, because now all we have is $20 back. We've lost 80. Not a great strategy for a business owner. And if you want to become a wealthy entrepreneur, that is not the right strategy that you need to implement. So let's talk about some of the strategies that we can implement in our business that will help us reduce our taxes. So one of the very first things is if you need to spend money or you have something that you need to invest in in your business, let's say a new vehicle, a new piece of equipment, you need to fix up the office, make it a better environment for your team, new computers, new monitors, whatever it is, those are strategic decisions that are going to be based on, if we invest this, we're going to get a return on our investment, we're going to make a better environment, we're going to create more productivity. Our new equipment or machinery is going to be more efficient so we can get a greater output. Those are strategic decisions that we can utilize to pay less tax. So here's how. If I have a December year end, like so many of you wealthy entrepreneurs out there, if we have a December year end, then if we spend money in January, we're not going to get the deductibility. So let's say it's a December 31, 2023 at year end that we have coming up. If I don't spend the money in 2023, I'm likely not going to get the deduction. So if I have to spend, you know, $30,000 in new equipment to create new efficiencies in my business, what I want to do strategically is instead of pay for it in January or buy it in January, I want to pay for that in December. Right. Let's take advantage of those efficiencies and that upfront payment so that we can get that deduction now and again. For the most part, we're going to be able to save that 20% for investment items that we're spending money on now. Now, it becomes a little complicated when we get into depreciation, but just keep in mind that we're going to be able to save a substantial amount of tax money by being strategic in our timing of when we actually invest those dollars. So that is going to be number one. Number two, there's other ways that we can be strategic in our tax planning. And one, you know, one of the deductions that the IRS and Canada Revenue Agency, they don't like is golf dues. Right? They don't like when people are going golfing and deducting it in the business. And that's okay. We play within the rules. We try and get access to as much deductibility as we possibly can. But here is a strategy for you, right? And golf dues and life insurance expenses are also one where not deductible. But. And here's the big but. If the beneficiary of those expenses, meals and entertainment or golf dues or personal life insurance, if the beneficiary is the corporation where they're receiving all of the benefit, not you personally, then the business, although it's not deductible, can still pay for it. Now, here's why that works, all right? It's because we don't have to pay tax personally to have the money in our pocket in order to pay for those things. Let me walk you through a golf due. So let's say, for example, you have a $10,000 golf membership, right? You've got a nice private course that you play at. That's part of a deduction. If you have that in your business. And, and it's a $10,000amount, it's not deductible. So you don't get your 20% savings. So you're not saving your $2,000 in taxes. Okay? Right. So it's still costing you $10,000. Not normally like it would be 8,000. Let's say you need to do this personally instead of a corporation. Well, if I need to take money out, we've already paid 20%. Let's say my personal tax rate is 30%. So I've got to take $10,000 out of the business to pay tax personally in order to pay for that membership. So if I've got $10,000, let's say it's going to cost me $14,000, because at 14,000, I'm going to pay 4,000 in tax. I've got 10,000 left over personally, that's going to pay for my membership. Now you see the difference, right? Although the business doesn't get that deduction for $2,000, it also means I don't have to pay an extra $4,000 in personal tax to make that expense happen for me personally. So there's another tactic for you. Even though items are not deductible, it might be a better tax position for you to have the business pay for those expenses, even though it's not a deduction. And again, a great idea for this too, corporate life insurance. If the corporation is the beneficiary of your life insurance, it's not a deduction, but that's okay. It's not taxable whenever life insurance is received by the corporation anyway. Although we don't necessarily want to see that happen anytime soon, it is a good idea to allow the business to pay for those types of expenses. And I'm going to leave you with one last strategic tactic for you. And this comes with income splitting. So in Canada they've changed the rules a couple years ago that limited our income splitting with family members unless they were actively involved in the business. And the rules are very similar in the United States as well. So this is why I want to jump in there. One of the ways that we're still allowed to income split in North America is to pay salaries to family members. Now those family members need to be contributing something in exchange for that salary and it needs to be at fair market value. But I'm going to walk you through an example here. My daughter, my daughter who's 13, my beautiful daughter Sophia, she comes in and does video work for me. And I can tell you, like many of you, our 13 year old kids can walk circles around us on TikTok or Instagram or whatever the next social media channel is going to be. They're way better at this than we are. We need to admit that because I like to think that I'm pretty good with tech and that's not a thing. She's much better. So at the same token, she can go out and she can manage my TikTok account, she can take videos, I do a lot of speaking engagements, she can take videos, she can take photos, we can publish them on our social media channels and she can be responsible for some of that. Right. I've got a marketing team who's amazing, but Sophia is a great addition to this to get content when maybe my marketing team isn't present. And it's really great because I need to pay her fair market value of someone that I would be doing this to otherwise. If I had to hire a photographer at every speaking event, you can imagine the thousands of dollars that would come in related to that. So instead I hire my daughter, I pay her a fair market value wage and, and I pay her, you know, let's say it's $15,000 a year. Why is that beneficial? Well, at my 20% tax rate in my business, I'm saving 20% tax on that. So we're saving $3,000 of tax every year in the business related to that. Now on the other side, normally if I had to pay my daughter $15,000 for her soccer, for her dancing, for her, maybe private school, whatever you have in there, instead she can pay for those things on her own because she's got this income now when she claims this income, she pays zero tax personally on it. This is huge. Instead I'd be paying 30 or 40%. She is paying nothing. So what does this mean? It means another multiple thousand dollars. So on a $15,000 salary, normally I'd be paying about 5. The company's going to be saving 3. We're now saving $8,000 in taxes by just shifting around an income splitting with my daughter. And my daughter is contributing fair market value services to my business. And we can push that. Right? There's differences with having a family member part of the business. The reliability, the 24 hour access, you know, the responsibility that we can put on them, the enforcement of what they're delivering to us. And ultimately, if we can match that up with a fair market value contract to a third party, we get that deduction. This is huge inside your business, right? Every time we can add a $5,000 savings. Oh, by the way, I also have a wonderful son, Jack. He's 15. He also gets $15,000 a year. So now I'm saving $10,000 a year in taxes alone and getting access to funds for those kids to invest in what they would be costing me anyway. So I'm getting that tax savings. So these are ways that we can add a lot of value into our business, into our lives, and start creating the path towards becoming a wealthy entrepreneur. So in summary, I want to summarize this for you because it's a lot of information. And yes, I'm talking about taxes. It becomes a little bit scary. But the ultimate idea is this. Here's your takeaways. 1. Look at your business structure. If you're paying more than 20% in tax personally, you should be using a corporate structure regardless of where you are. Maybe an llc, maybe a C corp, and maybe a corporation in Canada. Regardless, if you're paying more than 20%, let's pay attention and let's look at optimizing our business structure. Second is what are you paying yourself? Are you paying yourself a salary or a dividend from this corporation? There's ways to optimize this. I'll give you a little tip. If you pay yourself a dividend, you can probably save about 6 or $7,000 in cash in your pocket every year. So that's something you should be looking at as well. I love cash in my pocket. So 6 or $7,000 in cash in your pocket by using a dividend, I would be considering that as well. And then look at strategic opportunities. Right? Let's look at when we can time our expenses and our investments in our business. Let's stockpile them at the end of the year versus the start of the year. Let's move those investments forward. It will allow us to get access to tax deductions and then we look at strategic opportunities. How do we deduct items in our business that and get access to tax savings where we wouldn't otherwise by tax income tax splitting with our family members and looking at other opportunities like life insurance, golf dues, for example meals and entertainment where we can get deductions in our business and we don't have to pay personal tax to get those dollars out to spend those resources. So there's a few tips for you on how to pay the least amount of tax legally possible. I definitely want to thank you guys for tuning in today and checking out the Wealthy Entrepreneur Podcast. If you like what you heard today, please give us a like give us a subscribe if you want to learn more about how you could become a business owner that pays the least amount of tax possible, check out our website. It's@govro cpa.ca we're going to have the link below. 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