Hidden Tax Strategies, with CPA Tanner Adams - Replay

My name is Brian Scribonia, and on this episode of the Common Sense Financial Podcast, I've had just a lot of conversations recently with clients. And I. And I just think, man, if you would just allow us to get you in front of the right tax people, this really won't be an issue going forward or, you know, seeing clients. I've had a couple of these this year where clients are selling their business. It's like, well, you know, we really should have done this to make things better. So awareness, that's. That's the key. That's the whole point of this podcast, is bringing awareness to people.

Well, hey, everybody, and thank you for listening and joining us today. We hope that this podcast can provide you with some insights to help you grow and get closer to your goals this year. But before we get started, be sure to subscribe to this podcast. That way you'll be notified about new content and you'll be able to listen to Brian tackle a variety of different topics. So you can subscribe on Apple podcasts, Spotify, Stitcher, SoundCloud, pretty much anywhere that podcast can be found. And all the links to subscribe, as well as past episodes are available on the website@Brian Scribonia.com so thanks again for tuning in, and let's get started.

Opportunities are still there.

The attempt at passing down wealth from generation to generation. Consider the outcome, not just popular opinion. And the whole teaching there is about preparedness and being ready. There's a difference between what's real and what's true. You're listening to the Common Sense Financial Podcast. I'm your host, Brian Scribonian. Thanks for tuning in. And let's get into today's topic. A considerable amount of financial planning involves tax planning, of course, and throughout our process that we take with clients, what we find is that a lot of times there's this confusion, the confusion about what tax preparation is versus what actual tax planning is. You know, tax filing versus tax mitigation. Very different strategies, very different approaches. And so, as we head into the second half of 2023, just thought it'd be a good idea to bring today's guest on Today. I have with me Tanner Adams, who's a cpa. Tanner, welcome to the show.

Thank you, Brian. Appreciate you having me excited for the conversation.

You know, taxes are a big deal, right? And there's a lot of confusion that surrounds them. And so, you know, the goal that we always have with the show is to just bring people's attention to the things that maybe they're not thinking about, you know, we all have blind spots. We all have assumptions that we fill in blank spaces in our head. And so we just try to fill those in. But before we jump into tax strategies or just some information or whatever, maybe just for the benefit of the audience, just tell us a little bit about who you are, where you're at, how you got to where you're at, whatever you want to share with us to frame this out. That'd be great.

So I've been a CPA, or in the accounting tax world for 22 years now. Born and raised in Utah. Pretty much been here my whole life. Spent a year in California after I graduated from college. Other than that, been here my whole life. I'm looking to move at some point. We'll see where that takes me. But as far as kind of how I got into taxes, for me, I enjoyed math, so it's kind of a natural segue. When I was in college, I knew I want to go the business route. Wasn't sure exactly where that was going to lead me. I did have my first accounting class. I love my professor kind of landed for me, so I thought I'd go down that route. I also did a criminal justice minor. I thought about going to the FBI. That was a interest to me. We had someone come and speak in our accounting class. I was like a special agent in charge of the Salt Lake field office and told us that the FBI really likes accountants. So I thought that was a, you know, a gunpacking accountant. That sounds pretty cool. Never went that route, obviously, but that was something I had interest in, you know, and as an accounting major, you have two tracks, so you can go into audit or tax. You know, at the time, most of my classmates all wanted to go audit. That just didn't really appeal to me. I took my first tax class, loved my professor, started with it, and here I am. So I spent 12 years with five different CPA firms before going on my own. Never really found a good fit, if you will. They're part of the. There's part of the profession I enjoyed, there's part that I didn't. So I feel from those different partners and firms I worked at, I figured out what I didn't want to do. So that's kind of what I base my practice off of. For instance, one of the main things, a lot of CPAs will bill by the hour, which I don't think makes a lot of sense. I feel an attorney probably got in there at some point and change that. Yeah, to me, that just Creates I think an inverse relationship if you will. You know, because an accountant, I mean we can spend as much time as we need to on a project. So I saw a lot of issues arise when we would get something from a client. We would start that process, send them a bill and say hey what, what's this about? So for us, we do XP retainer, we're up front with a client, know here's what we're going to charge you for the services. So it just takes a lot of that guesswork out of it. Also I've noticed in my career, you know when you are being billed by the hour, I've heard you know, where clients went through a transaction, start a business, we'll find out about it later and ask them, you know, why not like why didn't want to send an email or do a phone call and be billed for 15 minutes. Right. So it just seems to create more of an open, an open relationship. You know, I've been my own now for we're approaching 10 years. We've got 15 employees. You know, I acquired a practice beginning of this year. It was actually the people that I interned with, which is kind of interesting, kind of come full circle. Yeah. Looking to merge with another out of Arizona. So looking to grow and man, just looking to, to move forward and I mean taxes change every year. I mean the government doesn't make it easy. The IRS isn't one to work with. Right. But it's job security for sure. So that's a little bit about um, kind of how I got into the work. You know, hobbies for fun, stay pretty busy with my job, obviously, you know, with the deadlines. I do enjoy the outdoors. I enjoy traveling when I can, you know, kind of getting out and seeing new things. Personally I've got two teenagers, 19 year old daughter, 17 year old son. So I've got my favorite one of each or depending on the day I like to say my least favorite. So keeps me, they keep me pretty busy.

Yeah, that's awesome. What's the weather like in Utah right now? I've only, I've been to Utah a couple of times and both times it's just snow covered. So what's it like now?

You know this week's really, I mean gotten kind of mild. I think we're, I have like low 80s but we were you know over 100 like a week and a half ago. It's. If you don't like the weather here, just wait 15 minutes, it'll change. I mean we could go from no one day to like 60 degrees a couple days later. So we definitely have all four seasons. But I'm in my age, I'm not one to shovel snow anymore. It's one of the big reasons I'm looking at.

So yeah, I got you. Yeah. And so that's kind of like St. Louis, right? It's 100 degree swing from one season to the next. But. Well, I think, you know, a question that I get with some clients, and I think it's a good place to start, is that we know that there's some, you know, lingering tax changes that are coming. Right. The Trump tax breaks that came into play early on are expiring at the end of 2025. Just what does the tax landscape look like, knowing that that's on the horizon?

Yeah, definitely. That's a great question. For now. I mean, to be honest, I'm kind of surprised that a lot hasn't changed with any regime. I mean, there are some great tax benefits out there. You know, the one thing that I've been anticipating or I think people in the industry are looking forward to, or not looking forward to, but we're preparing for, is just increased tax rates. If you look historically under Democratic leadership, tax rates are a little higher. You know, those did decrease under Trump, especially the corporate tax rate. You know, that was one that, you know, they really brought down just a flat percentage. So there's been talk of that increasing, you know, they've talked about increasing capital gains so many different areas. But that's, I mean, every year when they look at taxes and look at budget, all those are usually on the table. Right. So I think this year being a non election year, I think I would see some, I anticipate some changes. But it's interesting, nothing's happened as of yet. One big thing for business owners, they're familiar with the QBI deduction, the qualified business income deduction. So that came into place when the C Corp tax rate dropped to 20%. All the small business owners, you know, those of you that own S Corp LLC is kind of raised their hand and said, okay, well that's great, but what about us? You know, we make up the majority of taxpayers in the U.S. so currently you can get, you know, a 20% deduction on your personal return for your pass through business income. So that's one thing I think will expire now, something that they could, they could extend. And that happens a lot with these tax breaks. You know, the sunset, after a certain amount of time, some of those could come into play. Now one thing that they really have expanded and I anticipate will keep increasing or growing. Like solar tax credits, you know, electric vehicle credits. Those have been definitely an aim or a push for the current administration. So that's something that I could see that they will continue or possibly expand.

Got it. Yeah. So it's kind of hard to navigate. Right. So if you have something that's sunsetting but yet there's no clue of what's going to happen, you know, you got election year coming up here, soon to be here before we know it. And so that's going to make a big determinant factor too, right. On which way the wind blows. But based on what we do know, is there any specific tax strategies that you're working with clients on that you feel like has the greatest impact.

There? I mean, that's really dependent on the situation. Every client's different. So that's why important to get to know the client, to get to know their businesses, what they have going on. Because then I can, I can provide some better guidance and advice. Some of the main things that we see. The number one thing I always look at is choice identity. So you know, we get some clients that have started a business, it's new for them and you may not have got advice on what to set up. They may set up an LLC which gives them some liability protection, but depending on their business may not be the best tax wise, you know. So for some people, if we can put them in an S corporation or active business, you know, we can save them a significant amount of money without having to pay anything really. It's just by the way, we're electing to be taxed, you know, so we could save 15% on our profits there alone. You know, other things we look at are, you know, can you pay your kids? And the Augusta rule is a good one. Home office deductions. But probably the main thing I like to look at first once I get to know the client is just certain things that they're paying for in their life and see how we can relate that to a business, you know, because to me the best tax deduction or things you're already paying for we're just not deducting. Right? Because everyone wants tax breaks, everyone wants tax deductions. And yes, we can reduce your taxes, but a lot of times you've got to spend money to do so. So if you're just spending money at tax deduction, economically it may not make the most sense, especially if you're in a lower tax bracket. If you're in a 15, 20% bracket, you're only saving, you know, 15, 20 cents on the dollar. So that might not be the best use of your money. So those are definitely, definitely things that we like to look at. You know, people are in real estate, we look at cost segregation, you know, if there are any tax credits out there, depending your type of business or research and development tax credit, you know, because a tax credit is a dollar for dollar reduction taxes where a tax expense or deduction is based off of your tax rate. So those are always things we like to look at, see if it makes sense and apply for those. Because some of those, like for instance in R and D research involvement tax credit, we could potentially go back up to three years and get a refund for. So that's a really good break for, for taxpayers based off of the work that they're doing.

Yeah, it's fascinating to me, and I wrote an article about this recently on Kiplinger about, you know, CPA relationship and how that looks a lot different than a financial planner's relationship, but there's so much overlap. And I think that's, that's well known. But the issue is, is that a lot of these things that you're talking about aren't being done. It's fascinating to me that they're not being done. And so, like, I wasn't really aware of the R and D deduction until you and I had talked about that in a prior conversation. So it's, you know, everybody has this light that they can shine in front of them as they're walking down this dark trail of finance and they only can see as far out as that light shines unless you have a team around you that's, you know, shining spotlights and pointing things out. And, and so that kind of ties into, I think, how the relationship of a CPA with the client, where there's a lot of misconceptions around that. And I see that with doctors. And just to tell the story, I've always, up until about five years ago, I always went to traditional doctors. You kind of go in and wait in the waiting room for 30 minutes and then they blow in for two minutes and then they blow out. And so that relationship's not really there. It's just someplace that you kind of get a prescription or get, get a little bit of information and then you move on versus having like a functional doctor that you're visiting with or somebody that's more tied towards preventative care. It was the first time I ever did that. And they spent an hour and a half with me. I was blown away with all the time they spent. But now I see that relationship totally different than I did before. And part of that could be stemmed to, of course, people that you've already made the point of people not wanting to be built. They don't want to reach out unless they really feel like they are dying or they get a letter from the irs. So maybe more transactional is what I'm saying, you know, And I think there's so many missed opportunities there because the relationship, the conversations that are had, is where the discovery happens. Because I know for me, if a client calls and they have a very specific problem, I'm helping them with that very specific problem. And sometimes there's got to be more context around it. You pull in more information, but you may not have 100% of the full picture if they're really just focused on solving one problem. Whereas over time, having that relationship and talking and building a better understanding of each other's perspective, there's a lot of missed opportunity. Right. So I'm curious to know just from your seat and what you would want a relationship to look like with your clients, but maybe there's that misconception on the client side of what that should look like. What is that misconception that you think exists with that CPA client relationship?

Certainly. And that's a great analogy with like a medical professional. Right? That's kind of the old school or the standard. That's what everyone knows. And I think with CPAs, it usually is a transactional, like, hey, I like my cpa, but once a year he does my taxes, tells me, here's what I owe, or here's what's. And that's really it. Right. You know, to where that's the. The tax preparation. Now, the tax planning is obviously much different. That happens throughout the year, you know, so if we're only doing the taxes once a year, there's a lot of things after the fact, you know, we can't help with. There's a few things, you know. But as we talk throughout the year and have that open relationship and get to know what's going on, we can keep you apprised of, you know, any changes in the tax law or, you know, you have a specific transaction coming up that you want to know how it's going to affect your taxes. Those are the type of discussions that we have and that we like to have with clients and be open. I mean, it could be a simple email, but we just like to know kind of what's going on in your financial world. So we can best prepare, you know, we can make notes. So come tax time, we're not scrambling and asking all these questions, having you try to track down information. So it is more of a, you know, we are being proactive, preventive. We're figuring out things throughout the year and not just scramble because I mean, that's kind of a dirty little secret of, you know, CPAs. There are times of the year they are really hard to get a hold of. Like it's a very deadline driven industry. You know, March 15th is our original corporate deadline. April 15th, personal deadline. Then you have the extended deadline, September and October. So the vast majority of our work is happening in four or five months out of the year. You know, so there can be times where it's going to be hard to get a hold of your cpa. You know, then after tax season, you know, we want a little bit of a, of a break. You may not be able to get hold of them. And that's one thing that I, in talking to new clients or potential clients, you know, they just don't feel their CPA cares. Like I can't get a hold of them. I don't hear back from them for three weeks. You know, some of these situations that come up are pretty timely. So I mean having that communication I think is probably, is probably the biggest thing and feeling, feeling comfortable with your CPA because it is a pretty, I mean that relationship, I mean sometimes honestly feel like we're, I mean, I mean about more about my clients than their doctors. I mean sometimes we're even doing, it seems like marriage counseling. Like there's so many things that they ask us. It is a pretty personal relationship. So getting to know your CPA and me getting to know them, you know, and it may trigger something I've done with a client in a similar industry. Like, hey, have you considered this? Because like you say you don't know what you don't know, right? So it is always good to get a second opinion, have someone else look over your taxes. I think most CPAs do a good job. Some are also very, you know, they are conservative or this is a way that they learn how to do it. So some of these are tax strategies. They may say, oh, that's a red flag or I wouldn't touch it. So there's a lot of misconceptions on what can be deducted versus what can't. And things are changing in the, you know, the tax all the time. So keeping up to date on those helps as well.

Yeah. And I think too, when I think about the relationship that I have with, you know, like, you and the CPAs that we work with for our clients and our attorneys and our insurance people and, you know, the full, the full gamut of the entire network, I think a lot of times there is.

Before.

They come in and actually start working with our firm anyways, I can only speak for the clients that I work with is that when they come in, they're the quarterback. So they're the ones that are telling the CPA what's going on or they're telling their broker what's going on. And so they're trying to quarterback things blind because they really don't understand. And the reality of it is, is that having a financial plan should incorporate these tax mitigation strategies. And so it's, you know, the financial planner is taking the football so far down the field and then, you know, handing that off to the cpa. But if there's not a working relationship between the actual advisor and the CPA and the clients in the middle, that doesn't work extremely well unless that client's very well versed on what's supposed to be happening. Because what I run across a lot is client. And this has happened very recently. Clients will say, hey, we made a lot of money last year. So my, my CPA told me that I needed to, you know, spend money to, to so I'm not exposed to taxes on that. And I explained to them, I said, look, maybe you should have done that, maybe you shouldn't have. But we don't want the tail wagging the dog. We need to make good financial planning decisions, not just make one off tax decisions because that may not be what's best for the company. It may be better to just absorb a little tax hit if it's going to be better for building the business and building the wealth long term. So I don't think you can talk, I mean, unless you're just talking about, you know, filing a tax return. But if you're talking about tax planning, you can't talk about tax planning without talking about financial planning. And you can't talk about financial planning unless you talk about tax planning. And I, and I, and I just think that there's this, this invisible wall that's up with most clients where they, like I've said, they're kind of operating those relationships very independently in silos. And obviously that can work, but there's a lot of inefficiencies there, a lot of missed opportunities there. And if the, and I know you, you know this, but if the CPA is aware of what the financial plan looks like, they could more complement it instead of working against, instead of just looking at 1099s and sometimes wondering, what's this guy, what's this broker doing? There's actually collaboration. So I'm assuming you would agree with that. So I'm assuming you would agree with that.

Yeah, absolutely. I think that's very important is getting people on your financial team to communicate. We get a lot of questions in the legal and the financial. Absolutely. I think that's very important is getting people on your financial team to communicate. We get a lot of questions in the legal and the financial, you know, planning. And I said, look, I try to stay in my lane. Like I can tell you from a tax perspective, but let's make sure we get the big picture, you know. So I do a lot of phone calls with their legal counsel, with their financial advisor, because I mean, it's certainly helpful for me to know what their long term plans are like. Look, if you're just looking to save taxes this year, certainly we can do that. But I don't want to mess up something they've put into place. I don't want to mess up your legal structure, you know, because there could be a reason why they're setting you up in a certain entity. But I mean, the more that we can communicate is we should all be on the same team. Right? Because a client's not going to be working with someone to where their attorney tells them one thing. Their financial, financial planner tells them something in their cpa, like who are they gonna say, okay, well if I'm getting conflicting views here, like who do I really trust or who do I stick with? So having those professionals work together and being philosophically aligned makes a huge difference and puts the clients at ease too. Right. It shouldn't be a headache for them.

Well, it should be less work. Right. I mean, if they're not, if they're not trying to wear all the hats and quarterbacking and they actually have a team that's working together, you know, you have your own little family office, right. And so that's all of us, people that are like really successful, their time starved anyways, they don't want to be dealing with the nuances of all these different little things. So I guess. And again, I don't think you made a point. I think most CPAs do a really good job preparing tax returns. I think a lot of investment advisor type of people, they do find investing Money. It's not about, you know, people doing things wrong. It's just finding better ways to. For a client to serve themselves really is having a team instead of just having all these different silos. With that being said, like, and we've kind of already pointed maybe a little bit of an out, but, like, what are some red flags? So if somebody has a tax person, and I'm not asking you to badmouth anything or anybody, I wouldn't want to do that either. But if somebody has a tax person, is there certain red flags that they need to consider or certain things that they may need to question and think, well, maybe I need to either challenge them on this or maybe I need to maybe get a second opinion?

Certainly, the one thing that I think is a red flag when CPA will tell you any deductions are red flags, Honestly, I think it's something worth looking at, you know, especially when it comes to, say, paying your kids or Augusta rule. Now, these are in the tax law. As long as we're documented, prepared properly, there's no reason you shouldn't take it. Or I've heard, you know, I did this. I went to a training once, and the guy was a former IRS agent, had his own practice. I don't know, there might have been 40, 50 people in the room. I said, okay, who in here has heard that a home office deduction is a red flag without everyone raise their hand? He's like, okay, who's seen an audit? Zero. He's like, why would you not take that deduction? Right? So I think sometimes the CPA is trying to. I mean, they may say they're trying to protect you, you know, but if they're just always shutting you down or if you're the ones bringing strategies to them, and we hear that a lot, they're like, well, I heard this from another business owner or friend. Why don't my CPA bring this to me? Or when I do get potential clients, I review three years worth of their taxes to kind of see the financial picture. You know, some people have been offering the same way for 20 years. I mean, like, well, why didn't my CPA ever tell me this? I mean, that's not a fun situation you want to be in. To be like, hey, you've been overpaying taxes for years just because of one. One simple thing. So. And I think it's always good to get a second opinion. Just have someone look over it. Just be like, hey, I like my person. I think they're doing a good job. But is There something I'm not considering. Right. And give them some strategies.

Yeah. And just for the benefit of the audience, like how far back can you go? Like if somebody came to you and said, hey, here's my tax returns for the past three, four years and you find something that they could have done better, how far back can you go?

Certainly. So you have three years from the date that return was filed to amend it for a refund claim. Now, which isn't necessarily fair from the IRS side, if you owe money from 10, 20 years ago, they're going to still come after you. But to file a refund claim, unless there's a special provision, I know during COVID they open a few things up, but it's usually three years. So that's why we'll look at a three year history and see if there is something. Now, it's not very often we can go back and amend and oftentimes the expenses that we do find, maybe the mistaken automobile expenses, home office, by the time we prepare that amended return and the fee it costs us, they may not even see that benefit. But a lot of times they are kind of forward moving, like hey, let's put this into place. Now, this can be proactive for future years. But I mean, for instance, I had a client who sold his business and it was just a simple box that the CPA needed to check that didn't subject that gain to the net investment tax, which is additional. It was 3.8% under Obama, under the Obamacare rules. But for him it was a $40,000 tax savings because that whole gain on his, it was active income, it was his business he was in. And I've seen that on two or three occasions where it was just a simple thing that who knows, they could have been filing it the day before the deadline, may not have known. But often, not very often. But we do find those every once in a while.

Yeah, and that's a, I have a follow up question to that because a lot of times when clients are contacting me, it's because they're in the middle of a transition. Right. 80% of the time I would say that's the case. So a lot of times we'll have clients contact us and say, hey, I'm selling my business. Okay. And sometimes it's after the fact, unfortunately. But if it's before the fact, what are some like high level suggestions? Like I sometimes will talk. One of the first questions I always ask, is this a stock sale or asset sale? And just to be clear with them and you know, very seldom do they even understand what that means. And maybe you can explain that. But is there, is there, you know, a couple of high level things that they need to think about from a tax planning standpoint? Because let's be honest, if you're trying to sell your business, you're just trying to exit it and there may be some people around you telling you what to do, but you know, being equipped with knowing what that's going to look like on the other side of how much you're going to get to keep. These are probably some important issues to deal with before the sale, right? So what would be just some things off the top of your head that would be, would be helpful for somebody to think through?

Yeah, definitely. And as you alluded to, that's the first question I ask, is that an asset sellers of stocks? Because that makes a huge difference, you know. So for instance, if you're selling your stock, typically that's going to be a long term capital gain transaction, which for you could be taxed at 15%. Now if it's an asset sale, depending on how much you sell your business for, your highest ordinary income tax rate is 37%. So that's a huge difference. So if you're looking to sell your business, I'm always going to try to go stock sale or. But it also comes down to how you allocate that purchase price. So someone's giving you $2 million. Well, what's that related to? Or is there inventory related to that? Are there fixed assets? Or is it all, you know, goodwill? So that makes a difference. But also, and even before the fact, you know, because people always ask like, hey, what's my business worth? And I know it's kind of a cop out, but it's like honestly, what someone will pay for it, right? Like you have an exit price that you're willing to get out. Someone has an entry, entry price and that's always up for negotiation. But it also can be. Then I ask them what are the terms? I'm like, are you getting paid all up front? Is it installment agreement? You know, because if you're getting that over time, you're just paying taxes each year on the incremental amount you receive. So that makes a difference. But even before the fact, the biggest thing I tell clients, if you have a clean set of books, because someone looking at your finances, they're going to want to see some consistency there, you know, And I think clients that aren't, that don't have good records, they're probably getting less money for their business than they could. But you also want to identify, you know, because there are certain expenses we pay for as business owners. You know, let's be honest, it's one of the best, probably the best tax shelter out there, you know, like automobile expenses, certain things that you can write off your W2 employee, you know, so there's some things that we run through our business that are discretionary, you know, identifying those. Because if someone were to buy your business, they don't necessarily, they're not necessarily going to have those expenses. So they're buying a cash flow stream from you. So they want to make sure that their investment is going to pay off. But as on the buyer side for asset versus a stock sale. So if they buy your stock, you know, they have to take that over 15 year depreciation. So if they paid you $1 million goodwill, you know, they have to take that deduction over 15 years. If they do an asset selling by equipment, they can write most of that off in year one. So. But it really depends on their advice on the other side, if they have an attorney, you know, because that always is going to be kind of a point of contention. But I had one recently where, you know, as a lawyer client that approached me, his CPA didn't give any advice. I told him like, this is how you should structure it, you know, save him quite a bit of money. And he was just so grateful. He's like, oh, no one ever, ever told me this. And the other side was like, yeah, however you want it to be, right? So them not knowing it really costs them a lot of money. So that is definitely something that we like to look at. And there are some, like you're saying, if it comes after the fact, there's not a lot we can do, you know, but I'll run a, you know, for them. I just ran a quick, you know, here's kind of my gain calculation of what I think you'll owe on that. Just to give them an idea. Right. Because they have, you know, they may want to invest some money, but they want to make sure that, okay, after taxes, what am I going to have available? Right. Because it's just that unknown number. So just knowing what that number is, I think is, is very helpful. Now, you know, we're looking at that in a vacuum. Yes, those are the taxes you're paying on that transaction. But there's other pieces of your financial picture that could come into play. So you start another business, buy equipment there, well, that's going to be a deduction that can help offset that as well. So we want to make sure we get as many pieces of that puzzle together so that we can give you good advice and project out a good number so you know what to expect. Yeah.

And I think it's. It also underscores the importance of planning that sale as far out as you can to get your books and records in the right place, to get any succession that needs to happen put together, get the right legal counsel, right tax counsel, financial plan, have a plan in place that checks all the boxes before, beforehand, and not just waiting till the back end of it to say, okay, I have this money. What do I have to pay tax on? And what am I supposed to do with the money? So there's just this, you know, I find this too, just with people retiring, they oftentimes will contact us, hey, I'm retiring in two months. What do I need to do? Well, you should have called me five years ago for us to really do a better job of planning. It's not that we can't help you, but we could have probably done a better job if we would have had a lot of. A little bit more Runway to work with there. So, yeah, I think that's good. As we head into the, you know, second half of this year, and we've already kind of alluded to the fact that it's not probably a good idea to have a relationship with a tax person, that you're just getting them the 1099 and K1s and W2s after, you know, January 15th. Right. But actually doing tax planning, so when we think about that tax planning mindset, what are some things that people need to think about as they're kind of preparing for the end of the year? And at, you know, at what point should they. Should they actually engage with their CPA to talk through that stuff?

I think one of the most underrated and overlooked aspects of tax planning is your bookkeeping for your businesses. Right. So my view on tax planning, where I start, I always look at the most previous year, because that's our baseline. We start from there. We know what your taxes were. Do we look and see what's changed? You know, but if I don't have, you know, so they come to me halfway through the year and say, okay, I want to know what I can expect. Last year was a better year for me. I kind of get hit with a big tax bill. How can I be prepared or find ways around that? You know? But if I don't have. If I've got books that aren't updated that are three months old, it's not really that relevant. So to have accurate and timely books, to me is the best part of tax planning. Because I mean that your output's only as good as your input. You know, garbage in, garbage out. Right. So that's why for a lot of our clients, we offer bookkeeping, you know, monthly number one, so you can have the information, make decisions. Also, we saw this during COVID which really, to me, kind of locked in the system that we set up, you know, because when people were getting PPP loans, they wanted financials, you know, so we had clients are like, hey, I need to get this loan. Can you get my accounting done for a whole year? I'm kind of like, sorry. But like, that's why we do this monthly. Those clients are kind of at the front of the line. So if you've got those financials that are ready, especially if you go to get a loan, first thing they ask, we get your copy your tax return in your financials. So you're going to be ahead of the game, you know, in that case. So to me, that really is the biggest component to it, just knowing what your numbers are. We can project that out and run some scenarios. So right now, as I'm in a little bit of lull and kind of starting into, you know, my busy time with the extensions, I've had a lot of these conversations with clients recently. Just say, let me know how your numbers are. You know, are you looking to buy any furniture? Are you expanding? Are you selling anything? So I can put that into play. And then once we finish through our extended deadline, October, you know, we've got 10 years of activity. Sorry, not 10 years, 10 months. Out of the year, out of the way. We've got a great idea. What you're withholding is we run some hard and fast numbers, and that gives us a little time by year end to put anything in place as needed. But number one, I think the biggest thing is just knowing what that number is. No one likes getting that call or email on April 14th. Oh, by the way, you owe $20,000 tomorrow. What are you talking about? Right. That's kind of a. That's not a fun situation to be in. So, like, well, had I known, I could have done some things prior to mitigate that. So just having an open communication, letting us know what's going on in your world definitely helps us from our standpoint.

Yeah, I guess it just circles back to that relationship. You know, they, you know, it's having that ongoing conversation, not just about payroll, right? Making sure payroll is met or whatever, and monthly filings are done. That actually just flying the airplane, you know, making sure that you're landing into the next tax season with all the information that needs to be had, and there shouldn't be a lot of surprises. You may not know the exact number, but you're going to have a good idea that what the number is or at least have confidence that you've done everything you could to minimize. I mean, if you make a lot of money, you're going to pay tax, and that's. It's just the way it is. But when it's a surprise, that's where the problem comes into play, right? So I think this is really good because my goal today was really to help people understand one, just what's down the pike a little bit with some legislation and just some tidbits about how people really needed to be thinking about it. Because I've had just a lot of conversations recently with clients, and I just think, man, if you would just allow us to get you in front of the right tax people, this really won't be an issue going forward or, you know, seeing clients. I've had a couple of these this year where clients are selling their business. It's like, well, you know, we really should have done this to make things better. So awareness, that's. That's the key. That's the whole point of this podcast is bringing awareness to people. So, I mean, we've covered a lot of stuff today. You know, when we, when we get on these calls, a lot of times it goes by so quickly, right? There's a. There's a ton to cover, ton we haven't covered. But I know my audience well enough to know that there's, you know, they want to learn more. So if somebody does have a desire to want to learn more, research some of what we're talking about today, like, what are some things that you offer people? Maybe tax guides or download people doing things wrong. It's just finding better ways to. For a client to serve themselves really is having a team instead of just having all these different books or whatever, what do you offer people who want to have a little bit more information about all this?

Certainly. So for any new clients, especially referrals of yours, we're going to do silos.

With that being said, like, and we've kind of already pointed maybe a little bit of an out, but, like, what are some red flags? So if somebody has a tax person, and I'm not asking you to bad mouth anything or anybody, I wouldn't want to do that either. But if somebody has a tax person.

Let'S say for me, a three year tax review and strategy call is usually the best start.

So is there certain red flags that they need to consider or certain things that they may need to question and think, well, maybe I need to either challenge them on this or maybe like.

I say, for me, we do the three years, it gives me good baseline, gives me a good, you know, guide of what's been happening. Especially if you look back now where kind of copy.

I need to maybe get a second opinion.

Certainly we can see what effects happen there and we can look if there's any areas that we can amend. The one thing that I think is a red flag when the CPA will tell you any deductions are red flagged, honestly, I think it's something worth looking at, you know, especially when it comes to say, paying your kids or Augusta rule. Now these are in the tax law. As long as we're documented, prepared properly, you know, number one, then say, okay, here's what has been done, here's some recommendations, or have you considered these deductions and try to put that in place, see what we can do to help them. Each situation is different. And then, you know, maybe they want something, there's no reason you shouldn't take it. Or I've heard, you know, I did this, I went to a training once and the guy was a former. Further information on a specific topic that I can send to them, you know, after the call. But that's usually where IRS agent had his own practice. I don't know, there might have been 40, 50 people in the room. He said, okay, who in here has heard that a home office deduction is a red flag? Without everyone raised their hand, he's like, okay, who's seen an audit? Zero. He's like, why would you not take that deduction? Right? So I think sometimes the CPA is trying to. I mean, they may say they're trying to. All of our conversations start, I get the tax returns, you know, because a lot will say, oh, I've got a really. My tax is really easy. Then you look into it and they have eight different businesses. So it definitely helps me to know them better and we can generate a better conversation because if we just get protect you, you know, but if they're just always shutting you down or if you're the ones bringing strategies to them on a phone call and just kind of talk back and forth, I feel, and we hear that a lot, they're like, well, I heard this from another business owner or friend. Why don't my CPA bring this to me? Or when I do get potential clients, I reduce three years worth of their taxes to kind of see the financial picture. You know, some people have been operating the same way for 20 years. I mean, like, it's way more effective if I get the taxes first, you know, because then I know I can kind of laser point what topics to touch on.

What I'm going to do in the show notes, I'm going to provide some links to to your website and then also if somebody wants to.

Well, why didn't my CPA ever tell me this? I mean, that's not a fun situation you want to be in.

But connect with you through me, then of course I'll provide some content there on how they can get.

Okay, you've been overpaying taxes for years just because one simple thing. So. And I think it's always good to get a second opinion. Just have someone look over it. Just be like, hey, I like my person. I think they're doing a good job. But is there something I'm not considering? Right.

And get in touch with me just so there's some collaboration there. But I think today was good.

Yeah, definitely. No, I was very helpful. Good to talk to.

Yeah. Well, I appreciate you hanging out and spending time. I know you're busy, but I do.

Appreciate you coming down some strategies.

Yeah. Just for the benefit of the audience on the show today.

Absolutely.

All right, well, that concludes like how far back can you go? Like if somebody came to you and said, hey, here's my tax returns for the past three, four years and you find something that they could have done better. How far back can you go?

Certainly. So you have three years from the date that return was filed to amend it for a refund claim.

Today's podcast, I'm Brian Scribonia. Thanks for listening to Common Sense Financial podcast. Thanks for listening to today's show. If you liked what you heard, be sure to subscribe on YouTube and Spotify so that you can receive notifications when we release new episodes. I'm Brian Scribonia.

Now, which isn't necessarily fair from the IRS side. If you owe money from 10, 20 years ago, there's going to still come after you. But to file a refund claim, unless there's a special provision. I know during COVID they open a few things up, but it's usually three years. So that's why we'll look at a three year history and See if there is something now.

And this is the Common Sense Financial Podcast.

Well, thank you for listening to The Forbes Top 10 rated Common Sense Financial Podcast. Before you go, I want to encourage you to jump over to Brian Scribonia.com to access the full archive of blogs and podcasts. And if you want to be the first in line to get it's not.

Very often we can go back and amend and oftentimes the expenses that we do find, you know, maybe they mistaken automobile expenses, home office. By the time we prepare that amended return and the fiat costs us, they may not even see that benefit. But a lot of times they are kind of forward moving like hey let's put this into place now. This can be proactive for for future years.

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In it but I mean for instance I had a client who sold his business and it was just a any.

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Simple box that the CPA needed to check that didn't subject that gain to the net investment tax which is additional. It was 3.8% under Obama under the Obamacare rules but for him it was a $40,000 tax savings because that whole gain on his it was active income. It was his business he was in.

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Seen that on two or three occasions where it was just a simple thing that who knows, they could have been filing the day before the deadline. May not have known. But often, not very often. But we do find those every once in a while.

Yeah and that's a. I have a follow up question that because a lot of times when clients are contacting me it's because they're in the middle of a transition, right? 80% of the time I would say that's the case.

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So a lot of times we'll have clients contact us and say hey I'm selling my business, okay? And sometimes it's after the fact unfortunately but if it's before the fact, what are some like high level suggestions like I sometimes will talk one of the first questions I always ask is this a stock sale or asset sale? And just to be clear with them and you know very seldom do they.

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And what that means and maybe you can explain that but is there is there you know a couple of high.

Level things that investing involves risk including the potential loss of principal any references to protection, safety or lifetime income generally referred to fixed insurance products never securities.

Or investment they need to think about from a tax planning standpoint because let's be honest, if you're trying to sell your business, you're just trying to exit it and there may be some people around you telling me what to do but you know, being equipped with knowing what that's going to look like on the other side of how much you're going to get to keep. These are probably some important issues to deal with.

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Right. So what would be just some things off the top of your head that would be would be helpful for somebody to think through?

Yeah, definitely. And as you alluded to that's the first question I ask is that an asset sellers of stocks because that makes a huge difference, you know. So for instance if you're selling your stock typically that's going to be a long term capital gain transaction which for.

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You could be taxed at 15% now if it's an asset sale depending on.

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Business for your highest ordinary income tax rate is 37%. So that's a huge difference. So if you're looking to sell your business, I'm always going to try to go stock sale or but it also comes down to how you allocate that purchase price. So someone's giving you $2 million general.

Partner and or manager and are not intended to reflect guarantees on securities performance. The term build banking, private banking alternatives or specially designed life insurance contracts are not meant to insinuate that the issuer is creating a real bank for its clients or communicating that life well, what's that related to?

Is there inventory related to that? Are there fixed assets?

Life insurance companies are the same as traditional banking institutions. This material is educational in nature.

Is it all, you know, goodwill. So that makes a difference. But also and even before the fact, you know, because people always ask like hey, what's my business worth? And I know it's kind of a cop out but it's like honestly, what someone will pay for it, right? Like you have an ex should not.

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Shall constitute the price that you're willing to get out. Someone has entry entry price and that's always up for negotiation. But it also can be. Then I ask them what are the terms. I'm like, are you getting paid all.

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Front is an installment agreement, you know, because if you're getting that over time, you're just paying taxes each year on the incremental amount you receive. So that makes a difference. But even before the fact, the biggest thing I tell clients if you have a clean set of books because someone looking at your finances, they're going to want to see some consistency there. I think clients that don't have good.

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Clients or getting less money for their business than they could. But you also want to identify, you know, because there are certain expenses we pay for as business owners. Let's be honest. It's one of the best, probably the best.

We're communicating that life insurance companies are the same as traditional banking institutions, institutions.

This material shelter out there, you know, like automobile expenses, certain things that you can write off your W2 employee, you know, so there's some things that we run through our business that are discretionary, you know, identifying those. Because if someone were to buy your.

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They don't necessarily, they're not necessarily going to have those expenses. So they're buying a cash flow stream from you. So they want to make sure that their investment is going to pay off. But as on the buyer side for asset versus a stock sale. So if they buy your business on stock, you know, they have to take that over 15 year depreciation.

So if they paid you nor Scribonia Wealth Management LLC.

Million dollars goodwill, you know, they have to take that deduction over 15 years. If they do an asset sale and buy equipment, they can write most of that off in year one. So, but it really depends on their advice on the other side, if they have an attorney, you know, because that always is going to be kind of a point of contention. But I had one recently where, you know, as a lawyer client that approached me, his CPA didn't give any advice. I told him, like, this is how you should structure it, you know, save him quite a bit of money. And he was just so grateful. He's like, oh, no one ever, ever told me this. And the other side was like, yeah, however you want it to be, right? So them not knowing it really costs them a lot of money. So that is definitely something that we like to look at. And there are some, like you're saying if it comes after the fact, there's not a lot we can do, you know, but I'll run a, you know, for them. I just ran a quick, you know, here's kind of my gain calculation of what I think you'll owe on that just to give them an idea, right? Because they have, you know, they may want to invest some money, but they want to make sure that, okay, after taxes, what am I going to have available. Right. Because it's just that unknown number. So just knowing what that number is, I think is very helpful. Now, we're looking at that in a vacuum. Yes. Those are the taxes you're paying on that transaction. But there's other pieces of your financial picture that could come into play. So you start another business, buy equipment there. Well, that's going to be a deduction that can help offset that as well. So we want to make sure we get as many pieces of that puzzle together so that we can give you good advice and project out a good number so you know what to expect.

Yeah. And I think it also underscores the importance of planning that sale as far out as you can to get your books and records in the right place, to get any succession that needs to happen put together. Get the right legal counsel, right tax counsel, financial plan, have plan in place that checks all the boxes before beforehand, and not just waiting till the back end of it to say, okay, I have this money, what do I have to pay tax on and what am I supposed to do with the money? So there's just this, you know, I find this too, just with people retiring, they oftentimes will contact us, hey, I'm retiring in two months. What do I need to do? Well, you should have called me five years ago for us to really do a better job of planning. It's not that we can't help you, but we could have probably done a better job if we would have had a little bit more Runway to work with there. So, yeah, I think that's good. As we head into the second half of this year, and we've already kind of alluded to the fact that it's not probably a good idea to have a relationship with a tax person, that you're just getting them the 1099s and K1s and W2s after, you know, January 15th. Right. But actually doing tax planning. So when we think about that tax planning mindset, what.