Pay Fewer Taxes Next Year! Tax Planning After Tax Day

[00:00:01.590] - Alice

Welcome to Books in the Biz, a podcast that looks at both the financial and operational sides of success. Please welcome our hosts, Dan Paulson and Richard Veltre. Dan is the CEO of Envision Development International, and he works with leaders to increase sales and profits through great cultures with solid operations. Rich is CEO of the Veltre Group and a financial strategist working with companies to manage their money more effectively. Now on to the podcast.

[00:00:30.600] - Rich Veltre

Why, thank you, Alice, our wonderful AI spokesperson. She does such a great job. It's so consistent every time. Rich, how are you doing?

[00:00:40.980] - Dan Paulson

Doing okay.

[00:00:42.840] - Rich Veltre

Black season is done. Yeah, For now, for the next few minutes. And then I think you guys... Doesn't all the accounts say go on vacation between the 16th till, I don't know, June, and then they come back and basically start the process all over again?

[00:00:58.240] - Dan Paulson

Yeah, everybody but me.

[00:01:00.130] - Rich Veltre

Well, that's because you're not a tax accountant. You're a financial strategist in the CFO, and that's what keeps you busy year-round, which is why I wanted to bring up this topic. We talked about this, of course, off there And said, I always hear about tax planning. There's always this discussion of what tax planning is. I think most people don't understand because most tax accountants don't touch it until December 15th of this year. Yeah. Which really isn't planning, in my opinion, because you've got all this year to really work up to that. Why wait till December and then find out, oh, well, we think you're going to owe this much, or you might get this much back, or go buy a truck. We talked about this in another episode. Go buy a very expensive truck so you can write off more stuff. That really isn't planning at all. So I wanted to turn it over to you because as we know, the time of this episode, tax season has pretty much wrapped up as far as you've either filed the extension at this point or you paid your taxes or the... Well, I guess, unlucky for you, because if you're in business, you're getting money back all the time, you probably need to redo your business a little bit.

[00:02:16.650] - Rich Veltre

Or you were very good at how you tax planned and you were able to write off a bunch of stuff through like R&D credits or whatever you were capable of doing. So I guess it's not necessarily that you can't get money back and still be successful. But typically when we see refunds, it's not because we're a profit. Anyway, at this point, I'm going to turn it over to you. So if you could explain what tax planning really is, why you should be looking at it this time of year versus the end of the year, and maybe share some examples of how tax planning goes about or what you do to solve that.

[00:02:54.160] - Dan Paulson

Sure. Well, let's look at a timeline, all right? Tax Tax planning stops at December 31st for any year. 99% of anything that you can do to adjust your taxes has to be done before the end of the tax year. And the tax year ends for most individuals, December 31st. Actually, I think it's all individuals, December 31st. Businesses might have a little bit of variation, but- Those retail companies who have to end in on February, that's. Yeah. So if you are looking to do tax planning, you do it by December 31st. Don't ask January 1. Definitely don't ask April 15. There's nothing else to really think about. So planning means I'm going to take control because I know what my income is or I have an idea what my income is. And I'll look at what deductions I can actually come up with or do or what's going to actually happen if I'm in my own company or if I have itemized deductions or standard deduction. You want to look at your tax return and see how it's going to come out before December 31st. Then you can see if there's a chance to do something different, or at least at that point, you know what the result is.

[00:04:09.440] - Dan Paulson

You shouldn't come to April 15th and be surprised. And I think that's one of the big things that makes me say we should have more of these conversations about tax planning, is that the things you can do happened already. So on April 15th, if you're surprised, it's a combination. It's you didn't ask, And your accountant didn't tell. So from my standpoint, I'd like to be able to tell people, look, this is what you're coming up against. Some people won't hear me. I get it.

[00:04:39.940] - Rich Veltre

Or they'll ignore you.

[00:04:41.780] - Dan Paulson

Or they'll ignore me. But there are certain things that are going to happen no matter what we do. And coming up to April 15th and having a surprise, and having that surprise be bigger than any of the cash you have to make the payment, is always a disaster. And it's a horrifying conversation to have, even on my side. I don't want to call you and tell you, Oh, surprise. Okay, I'm not coming to a birthday party, so you don't want to hear from me. I need Rule 14. So I think one of the things I wanted to say is, as we went through this year, I kept hearing some of the same thing. It would be a new client, somebody coming to me, and I was doing some work for them on their tax return. My prior accountant was no good. Why is that? Oh, the refund was just too small. The refund has really nothing to do with your accountant. And that's a little scary. That's where I think there's misinformation. So I had a couple of clients that had almost the exact same income as the year before, but they had changed jobs.

[00:05:51.500] - Dan Paulson

When they changed jobs, they changed to W4, which meant they changed the rate of what the withholding was. So they took too little out in the second year. So the refund went down. How is that the accountant's fault? And I'm not here to defend every accountant in the world either. But how is that an accountant's fault? You can't go by the refund. You really have to look at what's your tax rate. If you're paying 23 % every year consistently, there's no surprise. If the withholding changes, and you didn't realize it's not covering 23 %, then nobody did anything to hurt you. It's just that's the way it went. Why did your withholding change? So I think that's one of the things, one of the topics, just real quick, just to say, take a look. Are you paying a decent rate? If you're making a million dollars and only paying 20 %, someone's doing really well for you.

[00:06:44.160] - Rich Veltre

And hopefully you're doing legal stuff. Exactly. That would be good, too.

[00:06:49.760] - Dan Paulson

Yeah. I mean, there are people out there who have figured this out, that they are in multiple businesses and they figure out how to plan for the fact that they only want to pay 20 %, which is really It's a capital gain rate. It's what most people who pay ordinary rate are wishing they could get to the capital gain rate. You can get there, but you have to plan. You can't do it on April 14th and say, Gee, last year, I really only wanted to pay 20 %. Too late. There's just nothing. And most of the time, if you have a job, and that is really what's on your tax return, then you're going to pay ordinary rates for the most part. You are not going to get 20 It's just almost impossible. So again, just plan ahead. Get ahead of it. Figure out what your numbers are. If you want to do something different, think about it ahead of time. It's a 100 % proactive, not reactive game.

[00:07:48.980] - Rich Veltre

So as a business owner, this is where it typically the shell game starts. We got our March 15th deadline, which if you don't own a business, you don't worry about anything till April 15th. But if you own a business, you have your corporate tax information that needs to go in on that March 15th. At that point, you can decide to defer. And we see a lot of that. It's people just filing for an extension and trying to push things off until September or October, depending on which one you're filing. And that is one tax strategy. Don't get me wrong. There's been a few times I've had to do it because the number is pretty big and you still have to pay what you believe you owe, but you can get a reprieve if you think it's going to be a little bit different from that. But really, you're approaching it from a CFO standpoint. So now the corporate stuff is done, and you're now starting to look forward into this year thinking about how is this year going to impact next year? What are some of the things that you would look at that would make a difference maybe on what the tax burden is for a business, for a company, for a business owner, that type of thing?

[00:09:08.180] - Dan Paulson

Well, I think some of it is a little bit of just beware. Make sure you understand the situation that you're in. I'll give you one example, which it's one example, but it carries to multiple people who showed up and said, what's wrong with this picture? If you're filing jointly with your spouse, we call this, I call it the marriage penalty. I believe everybody else does, too, but I'm just being careful because I'm live. But what winds up happening is, if you go to work, and you have withholding taken out of your wages. They are taking it out with the assumption that you are the only person in the household making money. So yes, they give you a married, finally, jointly column of how to take out your taxes. But the assumption is that that money is your household money. If your spouse is also working, they take out as if she's the only one who's actually got household income. The problem is, when you file jointly, which usually has a better rate. The problem is, one person winds up on top of the other person. Okay. So the income now is two household income. Your withholding didn't take into account the fact that there was two household income.

[00:10:39.210] - Dan Paulson

They took it to one. So if you've got $100,000 salary, your withholding might be 15 %. If your wife or husband has $100,000 job, they're only taking 15 % out of you. But at $200,000, what tax bracket are you in?

[00:10:58.540] - Rich Veltre

Not the 15 % anymore.

[00:11:00.160] - Dan Paulson

Not 15 %. Guarantee you it's in the 20s. And nine times out of 10, you get that point and you say, oh, my God, I got to call these people and say, they owe money. Why do they owe money? So now you go back and you look. You can actually see it. Withholding 15 %. Tax rate, 22 %. The seven % differential times the $200,000. There's the amount of money they owe. It's pretty simple to see. Problem is, trying to explain it. So I'm trying to explain it now. So you tell people, look, if you have two incomes like this, especially if you don't have childcare deductions, if your kids are either older or really younger, whatever, if there's You have to look at the mix of other things that are affecting your numbers. But if that's all you have, that differential is going to be owed at some point. And realistically, you don't want to be paying it with your tax return on April 15th. You probably want to be paying for it by January 15th. Because otherwise, the government's saying, well, did you really know that you owe this already? And if so, we're going to add some interest onto it.

[00:12:15.840] - Dan Paulson

Because we should have had the money from you in January, and you're paying us in April. So you pay a penalty for not having the money paid in on time. So again, being out ahead of it, and you know this is coming, put some money away. In the government, everybody talks about, well, we don't want to give them a no interest loan. That's not a no interest loan. They're going to come back later and charge you interest. So it's interest.

[00:12:42.640] - Rich Veltre

It's avoiding a tax penalty of interest.

[00:12:45.180] - Dan Paulson

So I think, again, the proactive versus reactive is a real theme here. Trying to do stuff on December 31st or on April 15th is reactive. My tax bill is going to be too high. Like you said before, I'm going to go out and buy that really, really expensive truck on the last day, and I'll get a big deduction. Okay, well, it's still a deduction. And you still owe $100,000 on that really, really fancy pickup that you went out and bought. But they gave you a $25,000 a dollar a deduction for it, maybe, or $25,000 less in your taxes. You still owe the US 75.

[00:13:21.610] - Rich Veltre

Right.

[00:13:22.570] - Dan Paulson

Okay? Is that what you wanted to do? So these are the things I think. Again, being proactive. If you were already going to buy that truck and you have a choice of buying it on December 31st or January first, move it back a day. But buying it on December 31st because I need a deduction. Don't do it. Don't try to buy yourself a tax deduction.

[00:13:50.740] - Rich Veltre

Now, I think one of the bigger challenges, because most businesses are either LLCs or their S-corps, or their LLCs filing as S-corps, which means this pass through income. From a CFO point of view, that's a little bit more, I don't know, flexible, we'll say, than somebody who's getting a direct $100,000 salary off W-4. How do you start planning for that? Because beginning of the year could be really slow. The end of the year could come in like gangbusters. All of a sudden, you have $100,000 more profit than you thought you would or a million dollars more profit depending on how that size company. That's got to be a little bit trickier from the CFO side to try and figure out, okay, what's going to be our burden here? What do we do maybe to shelter some of that income?

[00:14:44.950] - Dan Paulson

I don't... Look, making money is a good problem to have.

[00:14:49.240] - Rich Veltre

It's a very good problem. Okay. Better than the alternative. Let's put it that way.

[00:14:53.040] - Dan Paulson

Yeah. And the other thing is to do not forget, which a lot of people do, do not forget that That trying to force deductions also impacts or should impact your financial results. So if you're going to try to go for a bank loan next year, don't throw a whole bunch of deductions on here because the first thing they ask for is your tax return. So you throw the deductions on, and all of a sudden, your net income is lower, and they say, We can't loan you that money. You didn't show that you could make the money to pay us back. So how far How far down do you want the tax return to go? You're going to run out and spend a whole bunch of money just because you need a tax deduction, and then you go to the bank and say, I need $100,000. We're not going to give it to you because you don't show that you can actually make it. You're not showing fiscal responsibility. We call it that. So don't get ahead of yourself in thinking that, oh, look at me. I'm going to save taxes. Taxes are always number two.

[00:15:58.830] - Dan Paulson

Financial is always number one. Do the right financial thing and then deal with the taxes after.

[00:16:07.000] - Rich Veltre

So in that case where you're taking out a loan, is it better to, again, put yourself a CFO in the company? We need We get this equipment. We need to add on to the building. We're not going to worry about trying to cut our taxes this year. We're going to worry about securing this loan, start the building process, and then we will take advantage of that depreciation or whatever the following year. Is that what you would do?

[00:16:34.500] - Dan Paulson

Well, again, it depends, right? If you're talking about a building, I think it takes it a different direction. Equipment, I absolutely agree with you. I think you have to really plot out, when do you need that equipment? What's it going to do for you? Your description of buying equipment and handing it to the bank saying, we're buying this equipment, is a It's a little bit different because the equipment hits the balance sheet. It is depreciable. So over five years, it's going to decrease in value, and the bank will already have figured that out. Okay, building shouldn't actually do that. You're depreciating it because the government says you can, but it should hold its value, right? So a building has a little bit of a different connotation. If you're going on buying a car that's going to depreciate in value by 40 % the minute you hit the curb as you're leaving, then I think you want to be a little bit more careful about that. But I think what I'm worried about, and what I'm saying I'm worried about a little bit more, is that EBITDA number. And I'll explain because I always do these little acronyms and everybody yelled at me.

[00:17:48.430] - Dan Paulson

So earnings before interest, taxes, depreciation, and amortization. That is a number on a financial statement that is very important for valuation purposes. So So banks loan you based on a multiple of your EBITDA a lot of times. So notice, I said earnings before, okay? And the things below it are depreciation, amortization, interest, taxes, okay? So So the interest on all this stuff that you buy is below. They're not dinging you for paying the interest. And the remainder of your payment, which is principles on your balance sheet. So it doesn't affect your income statement at all. And your depreciation So if I go buy that really expensive truck and it's appreciated all in the first year because the government says I can, it goes to depreciation. So again, it doesn't affect that EBITDA number. But if you're running around trying to spend a whole bunch of money to save yourself If you're putting yourself a tax deduction, that's where EBITDA starts to get hit because of all these other expenses you threw in there to try to get your number down. That's dangerous because you could really shoot yourself in the foot.

[00:18:57.530] - Rich Veltre

What typically are those expenses?

[00:19:00.260] - Dan Paulson

Anything. Oh, let's go buy 85,000 reams of paper and put it in a story and not call it inventory, right? And just put it all to supply expense. Okay, but you're reporting to people that you spend all this money. And now your office supply number is way out of whack. And bottom line just essentially hit a wall. All of a sudden, it's like, Hey, I got a nice taxi Well, I hope that gets you through for the rest of the year because you're not borrowing any money, or you can't apply for that business credit card or anything even small. All of a sudden, all these things come back at you like, why did you do that? Because you saved a couple of grand in taxes. Again, income is a good thing because you can do a lot of other things once you actually show that you have that income. So don't get the mindset that I need to get tax deductions. I hear it all the time, and that's why I'm stuck in that we got to stop people from doing that.

[00:20:03.590] - Rich Veltre

Well, it's almost been conditioned that if you make money, why are you paying it to the government? I even hear tax account say this. Why pay it to the government? Go buy something, go do something. Lower your tax burden. Take advantage of you using the money versus the government using the money.

[00:20:21.430] - Dan Paulson

And this is why I so often look at percentage, okay? I've had people come to me and say, all this money at the top line, bottom I'm like, look how much money I'm paying. And we start to look at the percentage. And I say, look, the number you should be at, you should be at the 30 % marking. We're at the 25 % mark. Okay, yes, you have to pay out to get to that 25 % mark. But you're five % ahead of where you should be because of this, this, this. These are the things that we did to do that. Don't think that I'm going to come to you and tell you, I'm going to get you to zero. I saw somebody do that, by the way, on Facebook. They said they And they had a title. And I said, I've never heard of that title. It was like they had a certification on how to get people's taxes down to zero. And I'm like, what a shame. And people are probably buying this.

[00:21:13.740] - Rich Veltre

There's no way. It will until the audit shows up, and then they have to pay it all back plus penalties and everything else.

[00:21:20.510] - Dan Paulson

The only way to get to zero is to not make money. And that's a totally different podcast.

[00:21:27.590] - Rich Veltre

Well, there are some wealthy individuals who, and I think this is what people need to understand, is you make more money. There are certain benefits you have to doing that. We can go into the political side of why and why not. But essentially, when they say, well, Jeff Bezos doesn't pay a diamond income tax. That's not true. It's coming out a different way or Amazon is not paying income tax. Well, okay, they had investments that the government has in turn allowed them write off and recoup that investment cost. And maybe you could talk a little bit more about what those differences are, because I think we're most small to medium-sized businesses look at it, go, well, how come Amazon can pay no income taxes, but I have to pay 30 What's that, for example?

[00:22:17.010] - Dan Paulson

I can do that, and I'll tell you how I can do that.

[00:22:20.360] - Rich Veltre

How can you do that?

[00:22:21.880] - Dan Paulson

I'm going to use a name that is polarizing, okay? But there was an article that came out. I think it was in Forbes, and it was about Jerry Jared Kutner. Okay? Okay. I can hate him. However, political affiliation has nothing to do with what I'm talking about right now. Okay? And I don't care if you hate him, whatever. Okay? But the article was incredibly well written. Okay? And it was all about how come Jared Kutner's tax rate is so low? And if you really understand how it works, okay? And you understand the real estate, and you understand passive businesses. Passive businesses are businesses that you invest in that you do not manage. Passive activity rules say that passive losses are only deductible against passive gains. If you understand that and you are an investor type person like Jared Kutner is, Jared would go out and make an investment in a passive company. Now, the other thing you should realize is, real estate is automatically passive. So he would invest in a building or in a business that he didn't manage, that someone else managed. And he would invest in them when they were losing money.

[00:23:55.660] - Dan Paulson

Then he would go and turn those companies around. As those companies started to turn around, he would get cash. So he would invest in more companies that had losses. And as he built that portfolio, he was always getting cash because the cash was coming out of the businesses as they turned around. And then he would reinvest more. So as you keep building this portfolio of companies, you can build them up a certain amount, you can sell them. When you sell them, you can actually use some of those passive losses. So his rate was low because he did tax planning, because he was out ahead of it and said, if I do X, Y, and Z, the tax code says, here's how it's going to play out. And he probably had spreadsheets upon spreadsheets or teams of people making spreadsheets for him, where he was actually able to put this on a table and say, this is what I'm going to do. He used legal method to tax plan to the point where he was paying less taxes than somebody else. So everybody turns around, jumps on these people and says, he's a cheater. He should be paying more.

[00:25:14.330] - Dan Paulson

Okay?

[00:25:15.030] - Rich Veltre

Yeah. Not paying their fair share.

[00:25:18.170] - Dan Paulson

He's not, but he's following the law. The law says this is what you're supposed to pay. Now, down the line, he'll have a valuation on it for estate tax purposes or other ways that the government will get money from him. But I look at a state tax like there's nothing I could do about it. I could do my best for my family. But if it's an estate tax, I'm not here. So follow the rules. Put this all in front of you. If you have the ability to do things like he's doing, that's why they pay less, because they've planned it out. But again, the catch-off for the US government is Something like an estate tax, or a gift tax return, because he'll try to gift it to his kids, probably at some point. And at that point, there'll be a gift tax that he'll have to pay. So there'll be other things. But he'll use the law because that's what he's paying people for. He's not paying for He's not going to just file a tax return. He's paying for the value in the planning. So that's what you should be doing. You should be finding a way to get to the point, am I getting the value?

[00:26:25.060] - Dan Paulson

If all you want is a tax return to get done, fine. It's not going to cost a lot. But you can't belly ache over the result if you're not going to pay for the value of getting somebody to give you some advice.

[00:26:39.670] - Rich Veltre

That was an excellent example, I think, of where tax planning becomes so crucial. And for most businesses, they're not like a Jared Kutner, but they might look at another business to buy. And maybe, again, that business is flailing a little bit, but they can buy it. They believe they can turn it around. Well, they're going to take They're going to take the expense now, but maybe in the future, they'll get a return on that. But if you're not planning that ahead, this is where you will pay a lot more in taxes earlier on and not see the benefit of reinvesting to have money to create more wealth for yourself.

[00:27:17.220] - Dan Paulson

Right. That's exactly right. So I think that also leads to that understanding what you're doing and understanding there are ways to do things that might cost a little more. The question is, at the end of the day, does it come back? And like you said, timing. Are you paying more now or are you paying more later? Eventually, Jared Cushner is going to pay his amount. He'll probably wind up paying more. Because at the end of the day, it's just a matter of when is he going to pay it.

[00:28:00.350] - Rich Veltre

Because you will have to pay taxes sooner or later on whatever money, profit or loss. So yes.

[00:28:06.920] - Dan Paulson

Someday, he gets to the point and says, I'm retired. I'm out. I'm not going to do this anymore. And sells all the properties. Well, you sell it at value. And if the value has grown that much, great. He was able to use that cash up until the point where you write a really big capital gains check when he sold the businesses. So you don't know the future. You're only looking at the now, okay? But he's used his ability to actually get the now in his So we're not going to get paid for it.

[00:28:32.300] - Rich Veltre

That is probably the best advice right there. Now, I guess we should throw in a disclaimer here, Rich. You are not giving tax advice. Each situation is unique. And if you need help or want help, don't just take your word for it. Actually call you, talk to you, so you can get an understanding of their situation and make solid recommendations for what they need to So if they were going to get a hold of you, what's the best way to do that?

[00:29:05.080] - Dan Paulson

Email rveltre@veltregroup.com.

[00:29:08.940] - Rich Veltre

Excellent. And if for some reason other stuff isn't working outside the financials, you can always talk to me at danpaulsonletsgo.com. Feel free to fill out my form there and I will get a hold of you. We can chat about how we might improve your business so you can make more money. So Rich can turn around, figure out how you then spend that to minimize your tax risk or protect yourself or push that tax burden into the future. So Rich, thanks for sharing this. I think it was informative to a lot of people. And we will have to probably talk about more examples because there are a lot more tax events that happen throughout the course of the year, especially if you're in business. It's not done on April 15th in most cases, so we can chat about that. But again, thanks for your time. And we will talk to you next week.

[00:29:54.300] - Dan Paulson

All right. Talk to you later.

[00:29:55.780] - Rich Veltre

All right. Take care. All right.