Year-End Tax Tips: Proven Strategies for Painting Business Owners

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 of Bookkeeping for Painters.

How's it going?

It's, it's going well, you know, we are— man, I tell you, it feels like 2024 is just flying by, right? Like you look at the calendar and we're already like, you know, deep into fall. The holiday season's coming up and before you know it, the year is going to be over.

Yes. Which is a great time to talk about taxes and get any last tax strategies in before the end of the year, because once the end of the year hits, your, your options for tax strategies decreases significantly. So if you, if you've had a great profitable year, your biggest expense is probably going to be taxes. And so if you haven't thought about tax planning, now's a great time to do so and implement some tax strategies so you're not having to shell out a bunch of money that you could have saved to the IRS.

Yeah. And doing it before December 31st, because after the year is over, that window closes. And when a window closes with the IRS, a door does not open. It's not one of those things. It's, it's done. So, you know, make your moves strategically and intentionally and timely. Because we want to get this done. If we want to take the tax break in 2024, we got to make the move before the end of the year.

Yeah. So we have 6 things that we identify that you could look at implementing as a year-end tax strategy. This is not all-inclusive, but these are some things that we often see and help folks implement. So the first one is expense acceleration. So this one I think a lot of people will be familiar with. If you're not, no problem, we're going to go through it. So basically the whole idea is you're at the end of the year, let's say it's October, November, December, and you're looking for ways to save on taxes. What you could do is look into the, the next year, so January, February, March of 2025, and say, what do I need? I know I'm going to need an in January, let's say, that I can buy now and accelerate that expense, meaning bring it, you know, buy it now, and, and then that, that purchase will be a tax deduction on 2024, this year's taxes, instead of waiting to buy it into the next year. Now, uh, the trick here is that you can actually use a credit card, so you can put it on credit. You don't actually have to shell out cash and, and still get the tax deduction for this year, which is useful. And so, you know, maybe you have some, some jobs that you've lined up for January and you know you're going to need some supplies. Maybe you've already taken the deposit for those, for those jobs. And so you could go put the, the materials on your Sherwin-Williams credit account and then, you know, pay the balance down when it's due on a, on a business credit card. So that you're, you know, you're, you're getting the credit for the deduction, but you're not actually putting out any cash until the next year.

Yeah. And the one caveat I tell folks is, you know, this is one of those strategies that's almost kind of fun to implement because you get to go out and spend money. But so we need to show some restraint. Don't spend a dollar to save $0.20 in taxes. Only buy things that you actually need for your company, things that you are going to buy anyway, but maybe buy them a little bit sooner so you can get the tax break in this year and hold on to your money for an additional 12 months.

Right. And that's good advice for any of these strategies. Like, do things that make financial sense. That should be the first rule. And then look at it from a tax perspective to see how you can make it a tax-advantaged thing. But don't only look at it from a tax perspective because then that's— it's like having the dog wag the tail. It doesn't make any sense. So always do things that make financial sense first. Yeah.

The second one I think we're going to talk about is income deferment. And I kind of like to say this, this is the other side of the coin. From expense acceleration. Yeah, with the first one, you're trying to bring those expenses in faster. With income deferment, you are trying to recognize income more slowly. So in this situation, you are going to sell work, but you're not— and you're going to perform that work in 2024, but you're not going to collect the income from that until January 1st, 2025. Now, this does kind of go against some of the traditional wisdom, things that we have even talked about on our podcast about, you know, taking as large of a deposit as possible. In this case, you're actually trying to not take money until January 1st. The reason you would do that is because if you are a cash basis taxpayer, So I do want to emphasize that this and expense acceleration, or for cash basis taxpayers, you do not have to pay the taxes on the money until the year you receive it. So if we can push off collecting the billing on that until 2025, we don't have to worry about the taxes on that for an additional year. This will require some strategizing. On your part. You want to make sure that you have the cash in reserve to be able to fund operations, buy materials, pay your guys, and that you're not going to run out of cash if you don't collect right away. You're also going to want to make sure that you use this strategy with customers that you have a high level of confidence that they're going to pay. So these are going to be like repeat customers, people you've done work for before, people you know are good for the money. Because the last thing you want to do is, you know, go to collect on January 1st and they're gone. They won't answer the phone. Now you got to deal with trying to get paid. So if there's any doubt as to whether you can trust these customers to pay you, this would probably be, uh, something you'd want to skip.

Yeah, so to me it makes sense to do like a customer reactivation where you, you have your good customer list, like all the folks you, you loved working with, and you want to do a special offer to them that says, you know, interior painting in November, December, no money down, no money until January 1st. And so you do it to, you know, send out a email blast or text message or direct mail flyer, something like that to your previous customers that you, that you've loved working with, with that, that, you know, no money until January 1st offer for interior painting, let's say. And so you do the work in November, December for them, you don't take any money down, and then you collect full payment in January, January 1st. You can do it that way, or maybe just take a low deposit. You know, maybe just 10%, you maybe normally take 50%, let's say, and then you take the other 90%, something like that where you're just taking less cash upfront like you normally would. Now, obviously, like you said, Richard, you would want to make sure you have cash available, like you had a good solid year. You're not struggling financially to do this tax strategy, you know, because the whole idea again is don't do anything that doesn't make financial sense here. You want to make sure you have some cash that you can actually you know, be okay for a month or two to float that until January 1st.

Yeah. And something I get asked a lot is, why should I even bother with this? Aren't we just kicking the can down the road? Well, you're right. This is an income deferment strategy. We are absolutely kicking the can down the road. The reason it may be worth considering is to give you more control over your money. If you're able to hold on to those taxes and maybe put that money into a high-yield savings account or reinvest that money into your business instead of giving it to Uncle Sam right away, you'll be able to benefit by kicking the can down the road. It also gives you some control over when you want to recognize that income. So if you implement this strategy year after year after year and you keep kicking it down the road. Maybe you come across a year when you are in a lower tax bracket or you have some kind of tax credits available to you. For example, you, you know, you buy an electric vehicle and now you have a $7,500 tax credit. That's a great year to stop kicking the can and recognize that income. So it's about giving you more control over how you're going to pay your taxes. Rather than trying to procrastinate. The third thing we want to talk about is if you have an S corp, then you are paying yourself a W-2 wage or salary. So this time of year is perfect for reviewing your officer compensation. We know that every dollar you pay yourself through payroll is going to be subject to about 15 cents of payroll tax. So we want to make sure that our reasonable compensation is reasonable and no more. We want to keep it as low as we can reasonably justify. So the fall is a great time to look back and see, has my role changed in the company? Am I less active in the day-to-day operations? Have I shifted from, you know, being a full-time workaholic employee to maybe more of a part-time CEO investor role? And if that's the case, is my compensation still reasonable for what I do? If it's not, we might consider lowering it. We also might consider adding other fringe benefits such as, you know, healthcare to our officer compensation so that we you know, we raise it up without having to pay extra payroll taxes. If our officer compensation is too low, or maybe we haven't paid ourselves our W-2 wages yet, now is a great time to fix that problem. You know, fortunately, these things are reviewed on an annual basis. So if you spent the first 9 months of the year not taking a paycheck, you've got 3 months to fix that problem. Before it becomes a problem. So great time to review that.

Yeah, because that definitely is a red flag with the IRS, like having an S corp that you own and then you work in that you also work in and you don't have any officer compensation that was paid.

Yes. If you're taking tax-free distributions from your company but you're not paying yourself a W-2 wage, and this is for S corps— that, that is throwing up flares to the IRS saying, please come audit me. So we don't want to do that. The fourth one we have, and this is one that we hear a lot on social media, is buying a vehicle before the end of the year. This is actually expense acceleration, but like, you know, ramped up to the vehicle level. We want to make sure we talked about this because there is a lot of misinformation about how this works. Yes, a vehicle purchase by— before December 31st can be a huge tax savings in that year. But there are some pitfalls that you need to be aware of. Number one, is the vehicle going to be for business use? Honestly, a personal vehicle is not going to be able to be deducted, so it needs to be for business use. If the vehicle is mixed between business and personal, only the business portion can be deducted. So keep that in mind. The second thing is, can you write off the entire vehicle? Just because you buy an $80,000 truck doesn't mean you're going to be able to take an $80,000 tax deduction in that year. There are luxury auto limits that require you to depreciate no more than about $21,000 or $22,000 for most passenger cars and light trucks. Yes, there are some workarounds if you have a heavy vehicle that weighs more than 6,000 pounds, but know what those limits are and know whether your vehicle qualifies for those workarounds. Before you purchase it, expecting to be able to write off the whole thing. You may also want to talk to your CPA or EA about how you're going to depreciate it. Bonus depreciation is limited to 60% in 2024, so we would need to invoke Section 179 as well. Just understand the, the consequences of trying to write off such a big purchase. And then finally, I have seen social media stars recommend, you know, buying a Learjet on December 30th and selling it on January 15th. That does not work because of something known as depreciation recapture. So you cannot take a, you know, $80,000 deduction on January 30th and then sell that vehicle for $80,000 2 weeks later and not be expected to pay back that tax deduction. So don't buy a vehicle if you think you're going to be flipping it right away, or don't fully depreciate a vehicle if you think you're going to be flipping it right away. Understand that this does need to be, you know, something that you use in your business. It has to be ordinary and necessary. For you to be able to write it off. Number 5 has to do with health savings accounts. Now, I love the HSA. It is one of the best tax strategies available. You've probably heard me say this before, but it is one of the only ways that you can double dip when it comes to tax savings. HSA contributions go in tax-free. And if the money is spent on a medical expense, it comes out tax-free. It's double dipping. There's nothing else like it in the tax code. But in order to benefit from your health savings account, you have to have a health insurance plan that is considered high deductible and qualifies for HSA. Now, by high deductible, we're talking about $1,800 a year for individual or $3,600 a year for family. So it's not too high of a deductible. We also have to make sure that we are contributing to our HSA account. That's going to be $8,300 a year if we have a family. If the year ends and we don't contribute, that window closes and we don't get to go back in time and make that contribution. We lose out. On that tax break. Now, HSAs are— there's a little bit of a benefit there in that if you do miss the December 31st window and you can get that contribution in before you file your tax return, you can kind of sneak it in there. But I don't recommend, you know, pressing your luck. Try and get that $8,300 into your savings account before year end, and then you can use that money to reimburse yourself tax-free for any kind of health care or medical expense. So I love the HSA. If you do not have an HSA plan right now and you're thinking, I'm missing out on this, this awesome thing, look into getting one for next year. You know, this is the time— like, if you're, if you're buying insurance on the Affordable Care Marketplace, open enrollment is just around the corner. Think about buying an HSA plan for 2025, and then you can start benefiting from this. Yeah, if you get your insurance from your— oh, I'm sorry, I cut you off, Daniel.

Sorry, I was gonna say, yeah, HSA insurance plans are great for those high deductible healthcare plans. If you're just doing like yearly checkups, you're not— you don't have any significant issues, you know, health-wise, you and your family, you know, getting on one of those health high deductible healthcare plans is great. And then that allows you to do that HSA, which you said— which, like you said, it's like the only time where you can double dip on taxes. Tax-free going in, tax-free coming out. It's like the best deal.

Yeah, it's awesome, especially if you're not going to the doctor very often. Now, if you're a little nervous, like, well, what if I get an HSA plan and then somebody gets really sick or the kids need braces and now I need my old insurance? You can always switch back each year. Your HSA doesn't go away just because you switched insurance plans. Granted, you can't contribute to it in that year unless you have the HSA insurance, but that money is your money. It is not tied to your job. It is not tied to your insurance. It is your money that goes with you for life. And if you don't spend the money on medical expenses, by the time you turn 65 and you go on to Medicare, you can start drawing out of the HSA like a supplemental retirement account. So almost no risk with an HSA. One of the best things that the tax code has to offer. Speaking of which, another thing to consider is what about our individual IRAs? So these are regular retirement investment accounts, either traditional where the money goes in pre-tax or the Roth style where the money goes in after-tax, but then you never pay taxes on the growth. This is another window that will close. So you can contribute $7,000 a year for both yourself and your spouse for a total of $14,000. But once the year is over, that window does close. Now, this is like the HSA. You can kind of sneak it in. So if you're listening to this on January 2nd, and you haven't filed your tax return yet, go fund your HSA and IRA before you file your tax return. You can sneak it in, but once you file your tax return, that, that window is like, you know, shut, nailed, taped. It's not opening again. Yeah. Yeah. Make sure you get those, those contributions in.

Yeah. And the traditional IRA, if you want the tax deduction now, use the traditional IRA and contribute to that. If you're— if you want the tax deduction later, use the Roth IRA.

Yeah. Yep. Roths are awesome. Long term, you're going to make out like a bandit because you're going to build a huge balance in your Roth account and you're going to be able to tap that money for retirement and never pay tax on it again. So if you can afford Roth, if you can afford to defer the tax benefit until later, I highly recommend it. But if you need the tax break now, go with traditional. Just, just don't miss out on getting one or the other. So those are our year-end tax tips. Obviously, there are other moves that can be made. We just want to kind of keep it to the 6 most important ones. You definitely get with your tax professional, your CPA, your EA, talk to them before the end of the year. They're going to know your personal situation really well, and they're going to be able to help direct you to which moves are going to move the needle for you the most and be most appropriate for your situation. Uh, but the one thing I do want to emphasize here is be intentional about your taxes. Decide what credits and what deductions that you want to take, because if you are not being proactive, the IRS is going to tell you how to pay your taxes, and it's not going to be in your benefit. So captain your own ship, decide how you want to run your financial life, uh, and make some moves before December 31st. Awesome.

Love to hear your thoughts. If you like to join the conversation, go to Grow Your Painting Business on Facebook, join that group, and love to hear any ideas that you have for future episodes. And with that, we'll see you next week.

Thanks for listening, everyone.