In this video Ryan Vaughn answers a question from Restoration Fitness and Nutrition about how to handle the balances in the various Profit First accounts as the fiscal year ends. He explains that, for LLCs, S‑corps, and partnerships, tax is owed on net income regardless of whether money is distributed. The first step is to ensure the Profit First buckets have been funded throughout the year and then to make a reliable year‑end tax estimate (often with a CPA). Once the estimated tax liability is known, any cash in the Tax account that exceeds that liability can be safely spent on deductible expenses such as equipment purchases, vendor pre‑payments, or other ordinary business costs, thereby reducing the taxable profit. The Equipment account is the next priority: maintain a reserve sufficient for emergencies, but any excess can also be used for tax‑deductible purchases. Vaughn advises against using Owner’s Pay, Profit, or Income accounts for year‑end spending, and cautions that OpEx should only be used for legitimate pre‑payments. He offers practical ideas like buying gift cards for employee incentives, provided proper documentation exists. He also warns that simply withdrawing cash and coding it as an expense in QuickBooks (or similar envelope systems) will not survive an audit; the expense must be a real pre‑payment. The overall message is to leverage excess balances in Tax and Equipment accounts for legitimate, productive expenses that lower taxable income, while preserving the integrity of other buckets.
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Okay. Hey guys, I'm getting close to the end of the year and I just wanted to directly address a comment that was made a little less than an hour ago, or question. So I'm just going to read it for you and I'm going to answer the question because I think a few people might have this. So this is from Restoration Fitness and Nutrition. I was curious for our tax returns. What is best to do with the money in each account? So they're asking about the Profit First accounts, right? You have team member bucket, operating expense, owner's pay, tax, profit, equipment, what— and income. What's the best to do with the money in each of those accounts? Because we've saved in those accounts for that specific category. But which accounts do you want to get spent before tax year is up so you don't get taxed on what looks like is in there. So from a tax standpoint, we are always taxed, assuming you're not a C corp, which you should not be. And again, if you have questions about that, reach out to us. We can answer why. So assuming you're an LLC, S corp, partnership, you pay tax on the net income of the business. Whether you distribute that money or not, if it sits in the account or doesn't sit in the account, you're going to pay tax on basically what you earned during the year. Um, so I just wanted to cover that. So, uh, he continues, or she continues, they continue. Um, I've been told you want to use your money you've saved and buy things that Jim needs so that the money isn't taxed at end of year. If you spend the money on expenses, for sure that will reduce what you've earned on your profit and loss statement. It reduces your net income, so it would reduce how much you owe in taxes. But having these 5 to 6 accounts, do you need to do that with all of them? He's looking for some direction on that. So let me address that. And then Shannon Ferguson left an additional comment that With some questions that I'm going to answer as well. So here's the way we want to look at it. First step, one, we have to make sure that we've actually saved into these accounts throughout the year. So if you're listening to this question and you're like, I don't have all my accounts set up or I haven't been doing it consistently, that's the first thing you want to do because now you're in a position like Restoration Fitness is where they have cash in these other accounts. And so now there's opportunities to potentially reduce taxes and there's opportunities to do things to grow the business. But again, if you haven't saved up for it, you don't have that opportunity. So the next thing that you want to do is do a tax estimate. At the recording of this video, there's like 16, 17 days left in the year. You should have enough information to be able to get pretty close to an estimate of what you're going to owe in taxes. And if you don't know, there are CPA firms out there such as Insight Tax that does year-end planning and year-end estimates for people. And usually that conversation involves providing guidance on potential things that you could do to reduce taxes. So potentially something worth investing in. So let's say I do an estimate in taxes and it looks like I'm gonna owe $6,000 in taxes. Okay, I want to make sure that I hold on to that $6,000, but then I'm going to look at the balance first in my tax account. If I have anything above the $6,000, then I will feel very comfortable spending that money right now. on expenses, something that I can deduct. And that could be equipment, it could be prepaying vendors. Um, maybe there's things that aren't considered equipment, but they're still small equipment pieces that you're looking to do. Maybe you need a couple more jump ropes. Um, if you have some machinery, your, your bikes or your rowers need some maintenance. Any of those things, those would be worthwhile expenses to take on with the difference, right? So if I have $10,000 saved in my tax account and I know I only need $6,000 of it, I have $4,000 to play with. By spending that $4,000, I'm actually going to reduce even the $6,000 that I owe. And that's why I want to first look at the tax account. From there, the next account I would look at is the equipment account. What's that balance look like? Do you feel like it's sufficient? So I talked about in the book, the equipment account is one of those things where I don't necessarily think the goal is to continue to grow it to an infinite number. I think as the owner, you want to establish what's the dollar amount you want in that account. So that you're comfortable should something go wrong, that you can afford to fix whatever that is. You know, there was a time a couple years ago at our gym that we had a rower breakdown, and almost—I think it was two rowers that broke. It was a rower. I thought it was maybe a bike, but no, it was two rowers that broke down at the same time. That was—that made the class experience a little bit more rough for the members because they're used to. 6 rowers and now we only had 4. Um, and since we didn't have money saved up into an account, we had to basically fund the difference. Now, if we weren't— me and my business partner weren't in a position to do that, we've now made the experience even worse for our members. But with the equipment account, you know, let's say we had— we followed the Profit First system at that point. Keep in mind, this was pre-I wrote the book. So the idea of this equipment account hadn't quite caught on for us. If we had the money in the account, then it's like, oh, 2 rowers broke down, that stinks. But at the same time, that's why we've saved this money so we can use it. So whatever that dollar amount is, you don't want to go below that amount. But if, if you have excess in that account, that's another great area to look at spending on things that are business write-offs. Because it will reduce your taxes and it's money that you like. The idea here is it's money you are going to spend anyways. Basically, I'm not asking you to make up stuff. I get clients coming at year end like, dude, should I buy a boat? Because they think it can be a great write-off. And so my question is, I don't know, should you buy a boat? Like, is that part of your life plan? Is that part of your growth? Your wealth creation is a part of Your retirement plan. Don't buy things just for the sake of buying things because we never want to spend money just because it means we pay less in taxes. We have enough going on in the business that we should be able to pay saving taxes by spending money on things that are productive expenses. So whatever that looks like. And to take it a step further, maybe you're looking at adding a new revenue stream or boosting a revenue stream. Maybe you can prepay some of that marketing cost or advertising cost Or if you need to develop another page, or you know you're going to hire a consultant next year and you're just waiting for January to make it happen, see if you can pay them right now. Um, that's— I would look at the tax account and then the equipment account. And again, I'm only looking at excess amounts from the tax account. What did I estimate I owe? Anything above that I'm comfortable spending. In the equipment account, what's the balance that makes me feel comfortable that I can handle emergencies. Anything above that dollar amount, I can look at spending the money. I personally wouldn't look at my owner's pay amount to do expenses because the owner's pay is supposed to be for your personal lifestyle. And then profit account, I would not look at. You want to be pretty consistent with that as far as giving yourself quarterly profit distributions. And income account, that, that account just exists to transfer money to the other accounts. And I wouldn't spend extra money out of the OpEx account just because. Now, that being said, if you have the ability to prepay some of January's expenses and you have the cash available now, go ahead and do it. I'll throw out a really random quick idea for you guys. When I worked at a call center in college, they would do a lot of incentives, and part of those incentives were giving you gift cards. So if you did something really well, hey, here's a reward, here's a gift card. You— so because of that, that means that's an established, ordinary, and necessary expense. Businesses buy gift cards to incentivize their team. Well, if you have the cash, why not buy a couple gift cards? As far as documentation goes, you would just need to be able to prove to the IRS which employee earned that gift card if they ever ask. I've never actually had an auditor ask for that specific information, but if they did, that's what you would need to be able to do. So, you know, maybe there's a way you have team members you wanted to reward and give some bonuses to. Maybe do it in the form of gift cards. And then a comment on here from Shannon. He was wondering the same thing, but he's using QuickBooks envelope accounts. And his question is, could I make a withdrawal, withdrawal by end of year for expenses I'm saving for next year, coded in QuickBooks as that expense and just sit on it Not really, because if you're audited, the IRS is going to see from the bank statement that that was a withdrawal, and they'll be able to identify that those weren't really expenses on your books. So the only way to get that benefit is if you actually prepay those bills in December before end of year. But just taking a withdrawal doesn't work. And then everything that I just described would work the same way with the QuickBooks envelope accounts, um, because I'm, I'm not super familiar with it like you are, Shannon, but I'm assuming it breaks out, um, the envelopes just like your— we suggest you have a physical bank account and it breaks out the different accounts. So you would just look at the balances kind of the way I described tax account, equipment account. Um, anyway, so I hope those ideas help. I hope that answers your question. I hope that was helpful for all of you guys. Um, this— it's really great because this is a high-level question which shows, um, you know, you have a good cash management system in place. You have some habits created that are helping you find profitability. Um, and again, like I mentioned in the beginning, because you've done it, you have the opportunity to do these types of things because you've had the discipline to follow this cash system throughout the year. Uh, profit is a choice. Have the courage and wisdom to choose it.
