Unlocking Hidden Tax Strategies: Save Big on Your Painting Business's Tax Bill

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 this weekend, Daniel?

It's going well. I'm excited to, to talk about how We've been saving folks a bunch of money in tax in the last couple weeks.

Woohoo! Yeah, we love that, right? We love being able to save money on taxes. Uh, you know, it's funny, you know, business owners are obviously very focused on their expenses, but something that we tend to forget sometimes is the number one expense, uh, as a business owner and as an individual is going to be taxes. We pay a lot of taxes in this country, and a lot of times we kind of think like, yep, that's just life, right? There's only two things that are certain: death and taxes, and you can't avoid either one. There is some truth to that, but you can't— you may not be able to avoid taxes, but you can have a measure of control over how much tax you're going to pay. Something that I kind of learned, you know, when I started my accounting journey is, you know, we tend to think of taxes are the way that the government pays for things, you know, our military or roads and whatnot. And it is, but it's actually, it's also, and maybe even more so, a way for the government to incentivize behavior and discourage things that it thinks is, you know, harmful. So, you know, for example, if the government wants us to save for retirement, they give us tax advantages to open up 401(k)s. If the government wants us to buy homes, they give us tax advantages for buying a house. Uh, if, you know, we've heard about things like a carbon tax. So, you know, some politicians think that there's too much CO2 in the air and that maybe a carbon tax would be a way to discourage burning CO2. It's just it's like a lever that they can control to encourage behavior. So that's the government side. But as taxpayers, we have the opportunity then to say, well, I like this incentive, so I'm going to take full advantage of that. Or maybe there's something that we don't want to do and we're willing to pay a little bit more so that we don't have to. But it's kind of a game of knowing, you know, what opportunities are out there. And looking to see, am I willing to make some changes in how I do things in order to save money on taxes, or do I want to, you know, keep doing things the way I have been doing? It's putting control on us as the taxpayers. So I think today we're going to talk about maybe some like, like high-level major areas where you can make choices. And see if maybe, you know, you'd be willing to make some choices to save money on taxes.

Yeah. And we've been doing these tax analysis for folks that we work with and oftentimes just doing a quick review of their tax return and they're pulling their IRS transcripts. We're identifying, you know, $5,000, $10,000, $20,000, $50,000 in tax savings just by doing a review and looking at these areas that, that Richard's about to cover. So it's, it's like, um, in a lot of these things, you know, there's different difficulty levels. Like you're saying, some of these things, um, are super easy changes, like little tweaks, just submit a form and then now you, you have less tax to pay. And some of them are more complicated and will take some more time to implement. So it runs the range of, of complexity, but it's definitely— we're definitely saving a lot of folks a lot of money and something, something to pay attention to because this is the number one expense you're going to have in your business.

Yeah. Yeah. So just kind of jumping into it, I think the, the number one thing is looking at having the right entity type for your business. A lot of times we don't even think about this when we start, right? We're, we're in business. That's all there is to it. Actually, there's a lot of different types of businesses and making sure that you are set up in the right entity for the goals that you want to accomplish, for the amount of revenue that you're bringing in, for the amount of risk that you're willing to take, can have a huge impact on your taxes. You know, sometimes we kind of hear on social media like, oh, you should, you know, form a corporation, or you should elect this, or you should do that. And there's a measure of truth to that, but it is very nuanced, and your personal situation is not going to be the same as anybody else's. So I do recommend having like an actual analysis by a tax professional to, to find out, okay, if we made these changes, if we incorporated or if we did this election or if we did that, how is that going to affect things? And there's a lot of different levers in there. So a competent tax professional is going to look at all those different aspects. If they just shoot off, oh, this is going to save you 40% and they don't give you any more detail than that, they're, they're not fully diving into, um, to the analysis because there is no magic bullet and everything has pros and cons. So finding the right entity for you is going to be very important.

Yeah, and we did— we just, uh, just recently painted a business owner out of North Carolina, wasn't in the right entity, and so we're switching his entity. We're saving him like almost $10,000 in taxes this year from just making that simple switch.

Yeah, and sometimes, yeah, a lot of times it is that easy. But I'm a big proponent of making sure that people know what they're getting into and understanding, you know, like the responsibilities and obligations that go with some of these elections too. You know, there are certain things that are right for a lot of people, but not for everybody. So having the right entity, I think, is, is probably number 1. And then this is kind of like the opposite of that. We sometimes we see people who have multiple entities, multiple businesses, and they're all set up in their own LLC and they all have their own different form of taxation, but they're not set up efficiently. There is a process for doing this so that you are avoiding things like paying too much FICA. Paying too much income tax. And, you know, this— we kind of get into the legal aspect a little bit about who owns what and, and how to structure these things. But if you have multiple businesses, we want to make sure that they are set up efficiently so that the money is flowing in the most tax-efficient way before it finally ends up on your 1040 tax return.

Yeah, we've had a couple of clients that have run into this this year where I'm not sure how it starts, but I'm thinking like they're maybe talk to their lawyer, lawyer first and say, hey, you got to put these entities in different, different, um, set up these businesses in different entities so you have legal protection, which is part of the— that's definitely a thing. But then there's other pieces, how are those entities being taxed? And so making sure you're, you're setting up, up in a way that makes sense. Otherwise you could just spending a bunch of money on unnecessarily, like you were saying. And we've had to kind of fix a few clients this year on, on this topic because they had several different businesses and they weren't set up properly to minimize tax.

Yeah. If someone tells you that you need to form an LLC in Delaware or Wyoming and you don't live or work in Delaware or Wyoming, That's bad advice. So, um, it's, it's, it's, it's not quite that simple. Uh, so yeah, having, having a competent professional, uh, I like to draw it, like we draw it out, right? We, we put pen to paper and we do a diagram because I think it's just easier for folks to see it visually. Um, and today I was even meeting with a client and we, we drew things out and he had like this aha epiphany moment, and he's like, this makes so much sense, like, thank you for sharing this with me. Uh, and then when he found out how much money he was going to save in taxes, he was even more happy. So, um, understanding how your different businesses interact with each other and how the taxes flow, super important. Um, another one that we see a lot is not handling your salary correctly. So this could be a sole proprietorship or a partner who is paying themselves payroll unnecessarily, or it might be a corporation that is either overpaying or underpaying the shareholder. These types of inefficiencies usually result in either overpaying payroll taxes or overpaying income taxes depending on how the corporation is set up. Uh, it can be super difficult to know how to set your salary. Some, you know, I've talked to some people who are like, well, I set my salary because I need X amount of dollars to pay my bills, so therefore that's my payroll. And, and unfortunately, that's not the most tax-efficient way of handling things. There's multiple ways of getting money from your business and the payroll, the salary is just one piece of the overall puzzle. It's also one of the least tax-efficient pieces depending on how you're set up. So, you know, we do compensation analysis. We do— yeah, we use a third-party company called RC Reports and we do really comprehensive compensation analysis to figure out exactly what your salary should be so that you're paying the least amount of payroll taxes as possible and the least amount of income tax as possible. Another kind of a big one is not writing off all of your business deductions. And it's, it's funny, like most people are like, well, of course I write off my business deductions. That's what my business checking account is for. Not all of your business expenses are going to come from your business checking. Most of them will. But if we're owners of a business, it's amazing how much that business creeps into our personal life and we may be spending our own money or using our own assets in the business and we're not getting deductions for that. So, you know, we want to look and see, are we leaving some write-offs on the table? Are we making sure that we get everything that we're entitled to? And there might be, you know, certain ways using accountable plans or whatnot that, that we need to set up so that we are getting those deductions. But, but doing an analysis to make sure that we're getting every write-off we're entitled to is important. Another one we see has to do with depreciation. So I mean, if you do any kind of like, if you look at any kind of financial videos on TikTok or Facebook, you've probably come across people who are standing in front of a Bentley or a G-Wagon and they're wearing a Rolex and they're like, yeah, I bought this car December 31st. It's a tax write-off. I don't pay any taxes because I drive a Bentley. There's a lot they're leaving out on that. So, but those are depreciation plays. Understanding how depreciation works and how to use it efficiently, super important, especially before you drop, you know, $120,000 on a new G-Wagon. And depreciation has been changing a lot, right? We've got Section 179, we've got bonus depreciation. Bonus depreciation is changing the amount every year. In 2024, we're at 60%. Next year we'll be at 40%. We may lose bonus depreciation altogether if it sunsets with some of the other Tax Cuts and Jobs Act provisions. But, you know, knowing how to handle that vehicle and whether it makes sense even to write it all off in the first year, that's really important because that's an expensive purchase. We want to make sure that we're, we're doing that right. Another big one, you is healthcare expenses. Oh my goodness, healthcare has skyrocketed in the last couple of decades. And, you know, as Americans, we pay more for healthcare than, than most other countries. Are we using our healthcare expenses in a tax-efficient way so that we are getting some of these tax benefits? So, so at the outset I mentioned, you know, the government likes to incentivize behavior with tax credits. There are a myriad of tax credits and benefits around health care. How are we handling our health insurance premiums, whether we bought them from the Affordable Care Marketplace or we bought them from an individual broker? If we have a business, we want to make sure that we are getting the right types of deductions and credits around our health insurance. Maybe we're very, very healthy and we have very little health care expenses. An HSA can be a wonderful tool to save on taxes, save for the future. We may be in the opposite situation, right? We may have a lot of health care expenses. Maybe we're— we have a sick child or a family member who's at the doctor all the time. Health reimbursement arrangements, QSEHRAs, medical C-corps. I'm throwing out jargon. Using your business to help reimburse you for your medical expenses is a wonderful strategy. So making sure that your health care is part of your tax plan, that would be another big one. Another one, not taking advantage of tax-favored savings accounts. So this is going to be things like IRAs, 401(k)s, things like that. The government wants you to save for retirement. Believe it or not, they want you to have money when you grow old. They think it is in the public, public interest. And so they have created tax benefits around saving for the future. And if you are not the type of person who likes to invest in, in the stock market, that's fine. These rules are not tied to stocks necessarily. You can invest in alternative assets and still get the tax savings. You don't necessarily have to buy stocks, but understanding the different options out there— and I have a list, like, like with my clients, like, we want to start here, and once that's full, we move to here, and once that's full, we move to here. Making sure that we get the best tax breaks first and then moving down the line. So saving for the future, getting those tax breaks, super important. Another one has to do with real estate. So real estate's a wonderful investment. I could— we've done podcasts on real estate investing, but are you handling your real estate tax efficiently? Who owns your real estate? Is it you? Is it an LLC? Is it a corporation? It makes a huge difference. What's going to happen to your real estate when you pass away? Are your kids going to inherit it and get stepped-up basis, or is it going to end up, you know, in a corporation and not enjoy those tax breaks? What about renting to yourself? We don't want to get stuck in the self-rental trap. That is a thing in the tax code. How about, you know, what if we have losses in our real estate? Can we use those losses to offset our business income? It's a lot harder than it sounds. So understanding that, I mean, there are tax firms that specialize just in real estate because it is such a big topic. But, you know, understanding how real estate is taxed, how the deductions are used, what are the traps out there, and getting that all sorted out as part of like your master plan is another one that we see that a lot of folks don't have set up very efficiently. And then the last one on my list is missing opportunities for penalty abatements or unclaimed refunds. This is where having a tax professional who can pull your tax transcript really comes in handy. Uh, the tax transcript is one of the coolest things. It's like opening up the hood on the IRS and seeing what's underneath. Um, you're literally looking at the same information that they have, and it's amazing the opportunities that you might find once you do that. Uh, you may have paid a penalty for filing your tax return late or not paying your tax on time. It may have been years ago, we might be able to get that penalty reversed and actually have the IRS send you a check for a penalty that you paid in previous years. There might be money in your IRS account that you didn't even know about. And, you know, you might just need to file a simple tax return to access it. We were doing one of these tax analysis just this week for a client, and we found out that they had $1,000 in their IRS account and they didn't even know about it. And so we're going to file a simple return and get that money back for them. And that's, that's something that we were able to discover by, by pulling their tax transcripts. So, you know, it's like your medical records. You want to review these things yourself and be the captain of your own ship. So take a look at your IRS transcript, see what the IRS has on you, see if there's any opportunities for you to, you know, either reverse penalties get unclaimed refunds, heck, find out, you know, what letters the IRS has sent or what letters are going to send. That was another one. I talked to a client today and I said, you know, you got this letter from the IRS. And he's like, no, I didn't. And we looked at it and it's— he's going to get it. It's going to be a couple of weeks before they send it out. But now he knows what's coming before it gets to his house. And I think that's really empowering. But yeah, pulling your transcripts should be a part of your, your tax analysis. So yeah, I mean, we could, we could spend weeks talking about all of this. Those are just some of the highlights that I have seen in doing analysis for folks. You know, you can, you can have your own CPA do this. It should be part of your yearly tax strategy. But if, if you need help with it, We are offering free tax analysis for folks who sign up. Daniel, it's— we have a link in the bio, right?

Yeah, there's a link in the show notes if you want to get a free tax savings analysis and no, no obligation. You don't have to sign up for anything. It's literally— we'll, we'll do what you just said. We'll look at your IRS transcripts, most recent tax return, and identify any opportunities that you might have on the table, uh, so you can take advantage of those. Um, so yeah, definitely check out if you, if you feel like you, you might have some opportunities and you're just not, you don't have oversight over it. You don't have someone helping you in this, this domain. Definitely check out the show notes and reach out to, to us and we'll, we'll take care of you.

Yeah. Um, just, you know, finding out What the IRS knows about you can be, can be so interesting. You know, not all of these are going to be appropriate for everyone because we're all kind of different levels. And like I said, you know, it's, it's about having the knowledge and making the choices. So you might choose to say some of these, I don't want to do these, and that's fine. But there's going to be opportunities and being knowledgeable about what those opportunities are and then making an informed decision That's important to me. So hopefully you'll be able to do that. Like Daniel said, if you don't have anyone helping you and you would like us to help you, we would be happy to. But just, you know, try. I think the most important takeaway from this is, is you don't have to accept the tax bill that the government gives you. You can make choices, but it's important to do things proactively and to do them before the year ends. Because once December 31st comes and goes, it's really hard to change the past. So we've got 4 months left in the year as of this recording. Now would be a great time to, to look and see what your 2024 is going to look like and have enough time to make some changes before the year's over. Awesome.

Well, if you have any questions about the tax savings analysis or tax planning generally, go to Grow Your Painting Business, join the conversation, uh, let us know your thoughts. And, uh, like I said, check out the show notes for that free tax savings analysis. Uh, we'd love to help you out. And with that, we will see you next week.