Steering Towards Profitability: Build Support Teams & Maximize Tax Deductions for Your Painting Biz

Welcome to the Profitable Painter Podcast. The mission of this podcast is simple: to help you navigate the financial and tax aspects of starting, running, and scaling a professional painting business. From the brushes and ladders to the spreadsheets and balance sheets, we've got you covered. But before we dive in, a quick word of caution: while we strive to provide accurate and up-to-date financial and tax information, nothing you hear on this podcast should be considered as financial advice specifically for you or your business. We're here to share general knowledge and experiences, not to replace the tailored advice you get from a professional financial advisor or tax consultant. We strongly recommend you seeking individualized advice before making any significant financial decision.

This is Daniel, the founder of Bookkeeping for Painters, and this is Richard, tax director with Bookkeeping for Painters. How's it going, Daniel?

It's going well. How you doing?

I'm good. I tell you, we are definitely getting into the colder season. Our summer is over here in Northern Illinois, and we're definitely starting to bring out the jackets and the scarves. But that's just the way seasons go, right?

Yeah. Yeah. Well, not where I am, but yeah, it's— we're in the rainy season. We're coming out of the rainy season. In Nicaragua. So it is, uh, it's a little— it's like the worst part of the year right now for Nicaragua. I mean, it's still, you know, 80 degrees and sunny most of the day. It's a little bit more humid, um, and it rains in the afternoon a little bit, but, uh, so it's not terrible even, even though it's the worst part of the year. So we'll have a little bit more of that, uh, and then we start seeing more sunshine in in later November, December. So I can't complain too much. But yeah, today we're going to talk about building your support team in your painting business while reducing your taxes.

Yeah, I think this is a really appropriate topic, especially for this time of year, right? With the year winding down, we're getting into the holidays. You know, people celebrate different things, but we tend to come together as families more. And this is something that's very applicable because, you know, some of your greatest support is going to come from your family. You know, your spouse is probably your number one cheerleader when it comes to running your business. You're getting good advice from your parents. You're getting good advice from your friends usually. And, you know, we don't really think too much about just how valuable that is because it's kind of informal, right? We get around the dinner table and we pitch ideas at them and they give us some good advice, some straight talk. But if we were— so today I think we're gonna talk about how we can kind of make this a little bit more of a formal arrangement and how we can use the advice that we're already getting from our friends and family to benefit us in our business and possibly save some money on taxes.

Yeah. And, and I think pretty much everyone listening to this probably knows the importance of getting advice from outside sources. Obviously, I don't think you'd be listening to this podcast if you didn't see the value in that. And we're we often are getting advice from, like you said, friends and family, you know, maybe friends we've met in the industry events that we're going to around this time of year. So you're getting advice all the time on what to do in the business, how to grow your business, get it to the next level. But often, like you said, that informal advice is is great that you're getting, but if you formalize it a little bit, you can actually get some, some cool benefits out of that, which we'll talk about here in a second.

Yeah. So because we're business owners, we don't just have friends who give us advice. We have boards that give us advice. If we are a shareholder in a corporation, that includes S corps, LLCs taxed as S corps. We have a board of directors just like any other corporation would. If we are a sole proprietorship that or a multi-member LLC taxed as a partnership, we have a board of advisors. The only difference between the advisors and the directors is the name. It's kind of a little bit of a legal thing, but both these, these boards serve as our trusted advisors who give us our help. Helpful advice.

Yeah. And, and big corporations, like, they have board of directors where the board of directors is outside of management. Management is running the day-to-day operation. So, you know, you and your business, your business right now, you are management. Um, and so a board of directors would be somebody, a group of people outside of you. And so all you know, big corporate businesses, they have this set up already. So they have a board of advisors who advises management on how to run the day-to-day operations, but they're not actually doing any of the things in the business. They're not doing marketing, sales, accounting, you know, they're just giving advice. And so the board of directors is a formalized thing in big corporations, but small businesses often don't have this formalized. Even though that they essentially do have a board of directors or board of advisors, but they're just not— they don't have it formalized. So they're not going to getting any kind of like benefit in a legal or tax sense.

Right. And please don't think that your business is too small or too new to have a board of advisors. You, you need, you need these folks to, to encourage you, to let you know when you have good ideas and to let you know when you have bad ideas, because once in a while that does happen. They're the ones who are going to help you set your vision and your goals for the company. So if you're going to turn your small company into a big company, you definitely need a board of advisors to help you do that. Daniel, you made a really good point that this board are not employees of the company. They are there for you as the manager of this company. And so they would not have any kind of like, you know, liability to the company. They would not be under the control of the company. They would not be taking, you know, paychecks from the company. They're there for you, the manager. And, you know, who do you, who do you trust more? We kind of mentioned it earlier, but, you know, who should be on your board of advisors? Well, definitely, definitely your spouse if you're married. They're going to be the ones who probably know you best and who have the least qualms about telling you when you have a bad idea. Also your parents, if, if you trust them and they can offer that advice. If you have older children, could you involve them as well? I'm sure that they would love to tell you, you know, what they think of your ideas, but it also gets them involved in your family business and it gives them a stake in the business. So that would be a great thing to do. Other professionals, you know, successful business owners who are mentors to to you, they could certainly be on your board as well. So really anyone who can give you good advice and who you can trust.

So yeah, so this time this year, a lot of folks are going to conventions, they're meeting other painting business owners who might be a little bit more successful than they are, you know, and if you're looking for a mentor, you could say, hey, could you be on my board of advisors or just be something where, you know, once a year, once a quarter, you know, we're gonna have some sort of events for the business. So it could be, you know, one of your peers at one of these events that you often see, you know, at the PCA event or whatever.

Absolutely. So there's a few reasons why we should go through this effort of actually formalizing our board of directors, you know, putting down in writing who they are and getting together, you know, quarterly or at the very least annually to meet. Probably the, in my opinion, the most important reason has to do with the fact that it makes you a better business owner, right? These people on your board are going to give you the encouragement. They're going to follow up. On the things you said and they're gonna hold you accountable. It's so easy for us to have great ideas and then life gets in the way. It's hard to follow through and we need someone to kind of hold our feet to the fire and say, hey, how you doing on that idea you had last quarter? Oh, you kind of hit a roadblock? Well, let's talk it through. You know, these are people who are gonna give you straight answers, but they're not gonna beat you up or, you know, or make you feel bad when you make mistakes.

Yeah.

And so, yeah, the idea being that you will be a better business owner for doing this.

Yep. And yeah, accountability, getting guidance. The other big thing would be asset protection. So when you actually take these events, these board of director meetings, and put them in your minutes or put it— put this formalized in your operating agreement, this will actually build the case. So if you're ever challenged in court on whether your LLC or your corporation is a separate entity from you, you will have this docu— these documented formal events that kind of reinforce the idea that this corporation or this LLC is a separate entity from you.

Mm-hmm. Absolutely. So, so we can imagine, like, let's, let's say we, we were sued, unfortunately, and whoever is suing us wants to, you know, pierce the corporate veil. That's the technical term for going past your LLC and into your own personal assets. And you had to prove to a judge that you ran your business as its own separate entity. How powerful would it be to open up your business logbook and show that every quarter we held a board of advisors or board of director meeting to discuss company business? And here it is documented. That's going to go a long way to show that, yeah, you, you ran this company as its own separate entity. It wasn't just a slush fund for tax avoidance. It wasn't just a hobby, but you were serious about this. You know, we can't guarantee how things are going to go. There's a lot more to it than just having these meetings. But I think that would go a long way to legitimizing your corporation.

Yeah, absolutely. And then another cool benefit of formalizing your board of advisors or board of directors is that you can get tax deductions by setting it up properly and making sure it's recorded properly. So instead of getting just informal advice from your— all these people, you know, from your spouse, your family, your friends, peers in the industry, instead of just like getting it informally, if you formalize it, document appropriately, you can actually get tax deductions where you, you know, before would not have been able to do this.

Right. And being a tax guy, I'd love to dig into this a little bit deeper. You know, how does this give you tax deductions? Well, where do big corporations hold their board meetings? Maybe at a resort, maybe at a restaurant, somewhere where it is conducive for business. They don't generally do it in their own offices. Those can tend to be noisy, chaotic. It's hard to get away and really, you know, discuss the direction of the company. So they might go to a nice steakhouse, have a meal, talk business. They might go to a spa and rent a room and talk business and then get massages or spa treatments afterwards. It needs to be something that is ordinary and necessary. It needs to be something that is, you know, useful and helpful to the business. If one of your board members lives in a different country or, well, different, not country, but possibly country, but state, maybe it is useful to travel to them. Maybe, maybe you have someone who lives in Las Vegas or Orlando and it makes sense to go to them to have this meeting. This, the, the expenses involved with all of this are legitimate tax deductions for your board meeting. The travel expenses, the meal expenses, maybe not the couples massage, might have to pay for that out of pocket. But, you know, staying at the resort for this, you know, 1 to 2 day event would certainly be appropriate and necessary. So with a little bit of creativity, you could probably have a very enjoyable board meeting and enjoy some tax savings on, on travel or recreation that you were planning on doing anyway.

Yeah. Do you— I think you had said before that you were working with somebody on this. Do you have an example that you could run through on how someone's implemented this idea, formalizing it, and some of the benefits that they are going to see or have seen?

Sure. So yeah, I was talking to a client today. Um, he really benefits from the advice of his wife and his parents, so I suggested let's make it formal. Put them on your board of advisors. Take out a piece of paper, write down the names of your board of advisors, and write down the date that you formed your board. Keep that in your company records. That's the simplest way to do it. If you want to get a little bit more fancy, you could get a lawyer involved to draw up the documents. But really, you know, all that's really necessary is that you've written it down. Find a place where you guys can feel comfortable and talk business. Maybe it's a halfway decent steakhouse. And if it happens to be around Thanksgiving or Christmas and you might have been planning on getting together anyway, well, That's fine too. Make sure that you actually talk business, pitch your ideas, talk about your challenges, get the advice from your board, jot down in your record book some of the main ideas and some of the things you decided on, and enjoy a really nice meal and drink some good wine and have a great time with your board. That entire meal is a tax deduction. I would say, you know, this is probably one of the more simpler ways of implementing this. We could take it to another level and by adding in appropriate and necessary travel, like we talked about, maybe going, you know, someplace quiet like a spa or traveling to another city where your board members live. Or you might take it to the next level by taking advantage of what's commonly known as the Augusta Rule. And that is where you can rent your personal residence for up to 14 days a year and not pay taxes on it. So how that would look is maybe, you know, another business owner, similar situation as you, you need to have a board meeting and he needs to have a board meeting. You don't want to do it in your own home. It's too, too noisy there. Kids are too chaotic. So you agree to rent each other's homes for the day. You pay fair market value, you do it at arm's length transaction, and that rental is a tax deduction to your company. And when you receive the money from your friend's rental, you don't have to pay taxes on that because of the Augusta rule, as long as it's less than 14 days a year. So that could be a great way to stay local, have your board meeting, get some peace and quiet, and kind of shift some money from your company that would normally be taxed at your ordinary rate over to being tax-free.

Yeah, that's awesome. So it sounds like to take advantage of this one, you got to make sure you have— you identify who your board is, document that in your operating agreement or in your minutes or both. And then from there it's just, you know, updating your minutes as you have these quarterly or annually with who was there, what was talked about, and then you should be able to deduct these, you know, meal costs and travel costs. Is that summing it up? Anything I'm missing?

Yeah. Yeah. I want to emphasize that setting up, you know, it sounds really crazy, right? Like, board of directors, that's fancy. You don't need to file anything with the state or with the IRS to form a board of directors. When you are forming your corporation, you can put their names in, in the corporate documents, or when you're forming your LLC, you can put their names in the operating agreement. If you didn't do that when you first started, you can do it really at any time. You know, each year you're going to be updating these documents anyway. Add an addendum to your operating agreement or your corporate docs showing this board of directors. And this is, you know, this is how we do it legally. You don't need to get a lawyer involved if you don't want to. You could if you wanted it to be a little bit fancier. But, but yeah, you can, you can pretty much do this at any time. Like you said, Daniel, just make sure that it's put down in writing and everything is documented. And you're good to go.

Awesome. All right. Well, is there any other tips or anything else before we close out this podcast on building a support team in your painting business and while reducing your taxes?

Not really, other than if you're not currently doing this, and honestly, most people aren't, you should be. You should start now. You should do it before the end of the year. And it's not just a tax saving strategy. It is a business building strategy. The advice that you get from people who care about you is incredibly valuable. And if it's not formalized, we can miss out on it.

Yeah.

And so even if you don't go to a restaurant, even if you just do it simply, you know, get that advice. Become a better business leader. And, you know, if you can show your friends and family how much you value them by buying them a nice dinner and getting a tax write-off for it in the process, that's a nice bonus.

Awesome. Yeah, absolutely. All right, well, we would love to hear your feedback on this episode. If you have any questions, go to Facebook, type in Grow Your Painting Business. And join the group and we'll accept your invite. Feel free to share any thoughts you have or any ideas for future episodes.

Yeah, I really appreciate everybody listening. I hope you have a great end to your year and we will see you on the next episode.