EP 116 : Costly Tax Strategies with Roger Pearson
Introduction:
In this episode, we have a special guest, Roger Pearson, the Chief Business Education Officer of Seagull Technologies. As a master tax advisor and IRS enrolled agent, Roger has witnessed countless small business owners losing unnecessary amounts of money.
He is on a mission to educate entrepreneurs and provide them with the knowledge to build a solid foundation for their businesses, keeping more money in their pockets and giving less to the government.
In this insightful conversation, Roger shares the most common mistakes small business owners make that end up costing them a lot. From not educating themselves about running a business to commingling personal and business funds, he sheds light on critical aspects such as legal, paper organization, and tax considerations.
Take a listen to learn how to avoid these costly mistakes and set your business up for success. Let’s get started with this episode of the DYB Podcast!
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TRANSCRIPTION:
Hello and welcome to the DYB podcast for the last two decades. Today’s guest working as a master tax advisor, IRS enrolled agent has watched hundreds of small business owners lose thousands of dollars needlessly. So he’s on a mission to provide entrepreneurs the knowledge to build a solid foundation under their business to keep more money in their pockets and give less to the government.
Chief business education officer. of Seagull Technologies. Roger Pearson, welcome to the show my friend. Thank you for inviting me. My pleasure. Well, let’s kick it right off. What mistakes do people make that end up costing them a lot? When it comes to small businesses, which is mainly what I deal with, um, one of the things that I find is People, I mean, they’ve got this dream to go out and they’ve got to create their own business.
You know, they want to just chart their own course. Um, and [00:01:00] they just go out and they just start working like crazy. But this thing they don’t stop and think about is they need to educate themselves a little bit about what it takes to run a business, because this is something they don’t teach you in school.
Uh, unfortunately it is and they don’t even teach this stuff in college. The basics of building a business I’ve had, uh, uh, for several years, I taught tax classes actually, uh, and it would amaze me that I’d have, I’ve had business majors in my classes and they would tell me that the. They were never taught this stuff in school and when they ask about this type of stuff the professors would tell them well You’ve got to go learn that elsewhere.
You know, they seem to be only interested in, you know, preparing them for the corporate world, you know, and there’s there are two different things. There are two different, uh, two different paths in life and [00:02:00] So I have people come in, especially the first year, first, second years, and, uh, yes, I have had people drop off boxes of stuff before, uh, uh, but I have to spend usually the first three years educating people just on the basics of running a small business.
And there’s three aspects to that, um, the legal aspects, the, the, uh, paper organization. I should say and the tax aspects and the tax aspects is actually one of the most important one because you can pay up to 50% of your net profit in taxes. If you don’t do it right and you have to educate yourself, you really do.
And so that’s what my mission is to educate as many small business people as possible so that they, they’ve got a solid foundation. Under their business to build it upon. So, what are some examples of some mistakes, most [00:03:00] common mistakes you see? Some of the most common mistakes is, um, for instance, people go out and they’ll buy things, cash and things, and not keep the receipt.
Okay? Or I have people that, well, my accounting system is my checking account. Well, no. I mean, it shows the money coming in, the money going out, but it doesn’t prove that you used it for business. You know, and, uh, if you, if the IRS was to audit you, that’s what they would have a problem. A lot of people, what they do is they, they co mingle the funds.
They, they don’t open a separate bank account or a separate credit card account for their business. They just do it all out of their personal account. And that’s another big red flag, uh, if you were audited and. It really makes it difficult to, uh, put together a set of books for you and do taxes at the year when you do that.
So, I mean, if you’re going to start a small business, one of the first things you want to do [00:04:00] besides the. The legal stuff is, uh, open a, a, your own business, uh, checking account and, and credit card accounts and keep everything totally separated. So that’s a biggie there. Um, another thing that, uh, a lot of, uh, new entrepreneurs don’t do if they, uh, have travel expenses, uh, they don’t keep a mileage log.
Now. If you don’t keep a mileage log and you are audited on your returns, they can throw that entire deduction out and the mileage is usually one of the largest deductions you’re going to have. Um, in, in a business, unless you have like a storefront or something, but if you have any kinda service business where you have to travel around or any kinda sales business where you have to travel around your mileage is huge, huge expense.
And to cut down your net profits for tax purposes. So you have to know how to, to, to do a [00:05:00] properly, I mean, the i r s, what they want to see is they wanna see, um, the date. The purpose, the business purpose, you know, and like your client name or going to Staples to get office supplies or whatever, and then the mileage, day by day by day, and there’s some software solutions that’ll do that for you nowadays.
You press start and end, and you know, it records it for you and prints you out a thing at the end of the year, which is great. But, uh, most people don’t know that this is important, especially people in the, that are doing things like Uber or, uh, you know, those types of things. Um, they, the Uber report that they give you at the end of the year shows you mileage.
But it’s not the true mileage. It just shows you the mileage while somebody was sitting in your car. It doesn’t show the mileage going to pick up the person or, or, or going back home at the end of the day. Uh, and that’s why you need to keep your own log in addition to that, because you’re cheating yourself if you don’t.[00:06:00]
So there’s just some of the, those are just some of the glaring mistakes. So how does one know when to take. Actual expense deductions versus mileage. Generally, nine times out of ten, your, uh, just mileage deduction is better. Your mileage deduction, uh, for the IRS purposes, it includes, um, like your payments, your gas, your maintenance, the tags, the insurance, everything.
Uh, and it’s pretty liberal. It’s usually about 56 cents a mile at the moment. Or you can take, uh, actual expenses. If you believe actual expenses is more and a good tax repair, if you’re working with a good tax repair, they’re going to look at both of the sides of those and see which. is better for you.
Now, there’s some instances where you have to actually do actual miles. For instance, if you have a fleet, if you were in the taxi cab business and you had more [00:07:00] than five taxicabs, you actually have to use expenses. If you’re, uh, in an S corporation or a partnership recompensation plan, uh,
You have to actually, or the corporation owns it, you have to actually use actual expenses. You can’t use the mileage log. So, okay, thank you. What about, you mentioned the cabs with five, now does that translate as well to our painting contractors who have five plus vehicles in their fleet? That would be, yes, absolutely.
And generally, uh, if you’ve, if you, if you built your business to that point, you’re going to be incorporated as an either corporation or S corporation or partnership. And in that, in that case, um, you’re going to have to do actual expenses anyway, if the company owns the vehicles. Okay. So as, as, uh, somebody has grown at that point, there’s, um, Looking for more opportunities here for saving taxes.
[00:08:00] The, uh, there’s an opportunity to take a Salary and draw, but we need to take a reasonable salary and then we can take the rest and draw How do you know what that balance is? That’s a good question the the IRS actually has a table of average salaries for occupations that you can actually look at. Um, but a general rule of thumb from the IRS is that they consider a reasonable salary of 40 to 60% of your net profit.If you’re a sole proprietor or, uh, you know, or a, you know, like, like a one person, uh, uh, S corporation or something like that, that’s what they’re looking for. Because if you don’t, if you have a, of course, if you have a sole proprietorship, a hundred percent of your net profit is subject to. Uh, taxes, state taxes, federal taxes, state [00:09:00] taxes, and, uh, unemployment and, um, your, your payroll taxes.
Uh, if you’re an S corporation, of course, then when you grow to the point of S corporation, of course, then you can shield part of your income from. payroll taxes and um, yeah, yeah, you can just, well, actually that’s, that’s another thing. On an S corporation, you actually have to do a W 2 and pay yourself. If you’re a partner in a partnership, you can’t W 2 yourself.
You just take partnership draws. And then it works out at the end of the year. So there is a difference. You can’t, you can’t W 2 yourself on a partnership, only an S corporation or a C corporation. Thank you. So for the solo S corps out there, whether it’s LLC filing with S corp election or S corp. Correct.
They, uh, they need to take 40 to 60%. Salary of their net profit. That’s, that’s the guideline. Anything outside of that, the IRS, you’ve thrown [00:10:00] up red flags. Pretty much. Yeah. Because, uh, you know, all this money we just gave the IRS there, um, they said, but they’re only going to go after people that make more than 400, 000 a year, which is not really true.
One of their mandates and, and they don’t advertise this, but one of their mandates and I started seeing the letters coming out this last tax season is they’re going after people that, uh, are not taking salaries. Because they consider that evasion of payroll taxes. Wow. And, and one of their main, uh, things is going after that.
Their other main thing that they’re going after that is you can’t take, um, you can’t take profits out of your business in excess of your basis. The basis is. Um, hold on, hold on. I’m sorry. How do you mean by basis? Basis is what you have invested in the business. For instance, and, and, um. Your account should be giving you a basis worksheet along with your taxes.[00:11:00]
Uh, basis is, for instance, you, you start your business off by putting 25, 000 in, right? And so that’s your starting point for your basis. You’ve invested 25, 000 in your business. Well, if you make a profit that adds to the basis, if you have a loss that deducts from the basis. So every year it changes. Well, you can’t, you can’t take money out of the business in If in excess of what you have it, you can’t take a loss.
I should say you can’t take a loss in excess. If you’re profitable every year, you can take as much profit as you want out. But what a lot of people were doing is they were losing money every single year on paper. Mm hmm. And they were taking that loss even though they had no basis in their Business and the IRS is really starting to go after those people.
So we’re going to see the audits for S corporations and partnerships, uh, go up a lot in the next few years. Okay. So if I hear you correctly, the, uh, [00:12:00] a lot of our audience, they’re half a million, million, two. Million dollar businesses and most of them, the vast majority of them are bootstrap startups. So very little, um, capital to start with.
If they are, uh, taking max deductions, i. e. showing losses too, too many years in a row, then they’re throwing up red flags. Right. Right. The IRS likes to see a profit three to five years. That’s just a general rule. Three out of five. Three, uh, two out of five. Two out of five. They want to see a profit. Uh, if you’ve got five years in a row, it’s going to throw up a red flag.
It really, really is. Now if it’s legitimate, that’s fine, but they’re going to take a look, you know, and, and they’re going to, they’re increasing enforcement in that area. Okay. Could I, uh, ask a question and make a point here that there’s nothing wrong with being audited. As long [00:13:00] as you’re prepared. Oh, absolutely.
For the audit. Right. So being audited doesn’t mean you’re going to prison. You’re not going to have a fine. They just, they’re just calling you out and they’re saying, show us the receipts, show us the proof. Right? Correct. That’s exactly correct. And the thing about audits is that you shouldn’t go to the audit yourself.
Hire somebody, hire an enrolled agent, uh, to go do it for you. I tell my clients, I’ve said it in many audits, and I tell my clients I don’t want you there because you’re going to say something that’s going to prompt other questions. And so you need a professional to go into the audit for you. That’s real important.
That’s good to know. Right on. Okay, fantastic. Let’s see here. Well, uh, On the, uh, topic of the IRS, what, uh, or how, uh, what, what can we do to keep more profits instead of paying more taxes? Well, there’s a lot of vehicles used, you know, you know, you hear [00:14:00] about these huge mega corporations, they make all this money and they don’t pay any taxes.
Well, I mean, they do pay taxes, but not like we would think of it. And the reason they do that is because they use the tax laws to their advantage. And. The small business person can take the same type of, uh, advantage of those tax laws as the major ones. Now a lot of the business credits, of course, are only applicable to certain industries and, and, and certain size companies.
But the basic things that we can use at the personal level are things like depreciation tables, section 179s. And so, this is a thing that your tax preparer should be talking to you about also. Now, as far as depreciation, let me explain depreciation. Because a lot of people, uh, starting out have no idea what that is.
Depreciation is when you buy equipment that has a lifespan of more than one year, uh, the government says by default, [00:15:00] uh, you have to spread the cost of that out. You can’t deduct the whole thing the same year. By default, you have to spread it out. For instance, if you bought a computer system for your office, that’s considered five year property.
So you have to take, divide it up, and you have to take, uh, the deduction over the course of five years. Okay. Um, and there’s different ways to do that. There’s also other things like if you’re a sole proprietorship or a single member LLC, you can use like some section 179 says, okay, you can expense the entire thing this year or you can expense part of it this year and roll over the rest of it to the next year, which is great if you’re a startup because, uh, the first year you’re not Probably going to need a lot of deductions, but if you’re going to, you’ve got contracts coming in and you know, you’re going to make a lot more money the next year, uh, that equipment you can buy, you can take very little, uh, 179 this year and you can roll it over now.
You don’t want to do that if you’re as corporation or partnership, because that’s going to penalize you, it’s actually going [00:16:00] to end up costing more than you have to go over here to special depreciation, special depreciation, something Congress loves to play with in 2022, uh, you could depreciate. 100% of what you, uh, what you bought that year, uh, this year, it’s only 50%, you know, and, and some years it’s nothing, they just, it’s something they just keep playing with.
But, uh, I find that one of the problems I find is that a lot of accountants, uh, the kind of, you know, the stuff off and they call you when it’s done. Um, they’re just automatically take a hundred percent appreciation to get you the most. Lost this year, and that’s not a good thing. Maybe you, you shouldn’t, if you, if you don’t need the deductions this year, why waste them, you know?
It’s not a rollover. Why waste them? Push them off into a year. You’re going to need them, and these are the kind of discussions you need to be having, uh, about depreciation. I mean, I, uh, [00:17:00] I had a, uh, painting contractor, uh, was with me for over a decade, and he wanted to buy a house. But you know, being self employed, it’s not easy to get a mortgage.
So he had to show three years of tax returns, and they had to be within a certain profit range, all three years, for him to qualify for the mortgage he wanted. So I sat down with him, and we worked it over three years, and I worked the depreciation tables and things like that, to get him in the profit range so he…
He bought, he was able to buy his house. And that’s the type of work I do with my clients. And that’s how I use the tax laws to their advantage because they’re out there. And, uh, and if you’re hiring somebody to do it. That’s what they should be talking to you about. Well, speaking of hiring somebody to do it, how do you know who to hire?
Like, which tax professional, uh, which accountants, which CPA, how do you, how do you know when you’ve [00:18:00] found a good one? How do you, how do you find out? Well, you know, when you’re hiring an accountant or a CPA or a tax professional, you need to interview them the same if you were interviewing an employee.
Because basically, they’re working for you, you know. You’re just not hiring them. You need to look at it as if they’re working for you, you know. So you have to interview them. But most people have no clue how to interview for this because they don’t know the tax laws themselves. And so they don’t know the questions to ask.
For instance, some of the questions you should ask, a lot of people think, well, if I hire a CPA, they know everything about taxes. And, uh, so I don’t have to worry about it. Or if I say I count or a tax professional, you know, they know everything about, and it’s not true. Most people don’t know, uh, if to get your CPA certification, you have to take a couple of tax, basic tax question, tax classes, but you never have to take another tax class the [00:19:00] rest of your life.
If you don’t want to. Now, a good CPA will, and one of the things I, I always tell people that if they’re gonna hire a CPA, one of the first questions that you need to ask them is how many continuing education hours do you take in tax law every year? Because the vast majority do not. Really? And, yeah, because, you know, for most CPAs, their main business is accounting.
Taxes is like a side thing that they make extra money on once a year, and one of the biggest things about that is you get an account that just always files an extension because they don’t want to take the time during tax season to get to you, and you end up in September, October, finishing your taxes, which drives me nuts.
But you see that constantly. Um, it’s just like the last year I had a customer come in that They’re account, account retired. I said, yeah, I’ll have it done in a week. And they said, what, no, [00:20:00] what, what do you mean you’ll have it done in a week? We always have to wait until September, October to have it done.
I said, no, you know, it will be done by the time of the filing deadline. Don’t worry about it. What are some of the, uh, pardon me, Roger, what are some of the issues with, uh, filing an extension and waiting until September? Well, a lot of people have a misunderstanding about that also. When you file an extension, it’s an extension to finish your paperwork.
It is not an extension. to pay the bill. So when you file an extension, you’re expected to do as much of your return as possible to get a approximate amount of tax you’re going to owe and pay the tax by the dead deadline. And then when you file it, you make an adjustment. Sometimes you get money back.
Sometimes you have to pay a little bit more based on the final numbers. And that’s, uh, that’s a big misconception when people first get into, uh, get into taxes and especially business taxes. Thank you. A [00:21:00] question. What’s the distinction? So we’ve got, we’ve got, uh, accountant and bookkeeper. What’s the distinction between an accountant and a bookkeeper?
Accountant and bookkeeper is basically the same thing. There’s a difference between a CPA and a bookkeeper or accountant. Uh, CPA, uh, is, is, uh, authorized to represent you before. The IRS and a bookkeeper or accountant does not. That’s the main thing. Yeah, so all CPAs are Also enrolled agents. No, where’s it?
What’s the distinction there? Ah, there’s a big distinction. Uh a CPA Their certification is in accounting You know, but it’s a higher certification. They’re supposed to know more about it. So the IRS allows them to represent their clients before in an audit, for instance, and, uh, lawyers can also by default, all right, an enrolled agent is the only, uh, form, [00:22:00] uh, the only type of representative that has to actually earn their degree or their certification by.
Passing three three hour IRS tests. Okay, and taxes. Yeah, including all personal taxes, all business taxes and and and circular 230, which spells out all the penalties, uh, for not doing things right and, uh, the ethics portion of it. So there, you know, uh, there it’s it’s like having a it’s it’s like having a PhD in the tax world and it is because they’re going to be the most first are all role agents equal.
Okay. There’s a lot of enrolled agents that they don’t really specialize in taxes, so you have to be careful there. They, they, they’re good at passing tests, but they may have not had a lot of experience in as far as the business side of it, you know, even though they’ve had to pass the test for the [00:23:00] business.
So you have, in your interviewing, you have to make sure of that also. Thank you. So back to the CPAs. And when interviewing and looking for them, how do you know when you’re going to find one who’s not afraid to argue for you to the CPA versus, uh, being afraid to argue and not taking the deductions for you that they could?
Oh, well, here’s the thing. The thing about that, if you’re hiring a CPA and they don’t want to sit down and talk to you, walk away. That’s number one, because I find that if, if somebody is going to do a good job for your business, They need to learn your business. I mean, every client business client I have sitting down for me, I interview the point that I understand how their business works, how they want to work their business and what they expect out of their business, because unless I know those things, then I cannot apply the right tax laws.
In their case to do the best job for [00:24:00] them. Okay. Thank you. So along those lines, like for example, there’s a CPA who knows their stuff and they, they’re not afraid to take the deductions. They’re not afraid to argue, uh, them for you with the IRS. Then the other extreme is, and I’m just throwing them out there.
This is not a recommendation, uh, that anybody should go to, but something like H& R Block, where They’re, um, I’ve never used them, but I would guess that they’re not going to take max deductions. They’re just going to fill in the minimum things to get it processed because they do not want an audit, right?
Because they certainly don’t want to have to argue it for you. How, when you’re looking for a CPA, Uh, is there anything else besides, you know, you just shared, do they want to get to know you and your businesses or any other way to find out if they’re willing to, uh, uh, save you as much money as possible, even though they may have to defend it, they’re not, you know, they’re not afraid to argue with the question there really comes down to how much, you know, [00:25:00] and this is one of the reasons that, I do what I do in teaching people the three aspects of building a solid foundation under your business.
Because if you know this information and you go in and you sit down with your CPA, Uh, you’re going to know what kind of, what they’re supposed to be asking you and, um, how to respond to whatever questions they do. Uh, you know, and I think the biggest problem when you’re interviewing, when you’re starting to work with a CPA or an account is that you don’t know what they they’re supposed to ask you.
I mean, you, you, you’re going in there and you’re trusting them. Uh, that they’re supposed to have the knowledge to do whatever they need to do in your best interest. And that’s, and that’s not necessarily true. I mean, unfortunately, some people, it’s just a numbers game. You know, how many returns can they pump out in a year?
And unfortunately for their, There are [00:26:00] people in the, uh, the, the large firms like H& R Block that are also like that. On the other hand, there’s a whole lot of people there, um, with their new business initiatives and things that, uh, they’re really training people in business and they’re, they’re getting to the point where the things I’m talking about.
Okay. Um, they finally figured that out. So, so you provide, thank you Roger, you provide, uh, education to, I do provide education. Tell us about that please. You know, I got frustrated, you know, cause I’ve been doing this, uh, 23 years now, uh, helping small business people, uh, in the tax world. And I got frustrated because people would come in and they say, well, you know, well, where was I supposed to learn all of this?
And really, I mean, people don’t have time to go out and search the internet and everything else. I mean, you can find all this information there, but how do you, how do you correlate it? How do you put it all together? How do you make it work together? And so I put together a website and I [00:27:00] put out a like a nine part series I have called the foundation series.
It goes into the very, very basics of all the aspects that you need to know about when you do a business. But I felt that working more with people that I needed something more in depth, you know, because I was seeing too many people come to me from other sources. Um, and, uh, I was sick too many mistakes.
It was the mistakes were driving me crazy and these mistakes wouldn’t have happened if they knew. Uh, the law themselves. So I put together a comprehensive online course. I consider it a college level course. This is the stuff they don’t teach you in college. And it goes into every single legal format there is.
The advantages and disadvantages. Uh, when you should start one, when you should advance to another one. It goes into how to organize your paperwork. Not be an accountant. But how to organize all your paperwork so that you’re going to give yourself the best. A chance of all [00:28:00] the deductions that you’re entitled to and what you need to be taking to your account or CPA or tax professional.
And the third part is actually goes into tax structure and it goes into the tax structure for each type of legal format. And what the disadvantages and advantages of them are also. So it gets into depreciation and, and, um, and all the other things. Um, and it’s a, it’s a complete course. I mean, anybody that takes this is going to have a real good foundation, you know, because these three things affect everything you do in your business and everything you do in your business is going to affect these three things.
And, uh, you need to know them and the, and the better you know them, the better chance you give yourself a success. What is the cost for the course? The course is, uh, seven, uh, 97. Okay. It’s an extensive course. It has seven hours worth of video alone in it. It plus all the transcripts and a [00:29:00] whole bunch of bonus items.
Yeah. No, that’s a great price. That’s a great price. Yeah. Uh, people have told me I’m not charging enough for it. . Yeah, probably. It sounds like it, but you know, my mission is to help as many people as possible, so I want to make it. Uh, reasonable that the small businessman is something that they can afford.
Indeed. What’s the website for that course? Now, if you want to go to that course, I have a special link to that. It’s called protectingmybusiness. com. And all of the other stuff, the free stuff and everything else is at my main corporate site, which also has links to everything. And that is Seagull Technologies, Seagull spelled like the bird, technologies.
com. Fantastic. Roger, thank you so much for coming on to the show. You’ve been very insightful and, uh, the insight you’re sharing is valuable and we all need it. And, uh, while we’re also busy trying to run our business and, and get customers and get employees and get customers and get employees, we need to get sharp on, uh, the tax and accounting [00:30:00] aspects of it as well.
So I appreciate that. Absolutely. Thank you. Anybody had a follow up question for you? How should they reach out to you? Well, if you go to my, uh, the, my main corporate site at seagull technologies. com, click on contact and you can send me a message. I will get back to you. Fantastic. Thanks again, Roger. Thank you.