Year End Tax Tips for Small Businesses Part 1 | Ep 055

Kacie: This is going to be a two part series. Yes, because there's a lot to say. A lot with taxes, and this is something that every business owner, whether you are selling products or services, whether you are just starting or you've been in business for a while, this is something that all businesses need to know.

John: Most definitely. Yes, it's not and it's not something that you need to you should be waiting for the last minute on Tax season the deadline is what April 15th around that time frame every year depending on when it falls So, you know going to your tax preparer at on April 10th With a stack of papers hoping that they can create miracles is the wrong mindset.

Yeah

Kacie: The Business Project Podcast. Business can be complicated. We break it down to regular people like 

John: us, who can understand and find success. I'm John Crespo, accountant and consultant. 

Kacie: I'm Casey Bryant, marketer and event planner. If you run a business, or want to run a business, 

John: welcome to the show.

What's going on? What's up, y'all? I'm excited. It's that time of year. 

Kacie: That time of year. Tax season. Ding, ding, ding, 

John: ding. Where if you fail to plan, you plan to fail. And then everybody's gonna be rushing to their CPA. What am I doing? 

Kacie: This is your, this is all of your expertise here. Y'all are getting some free advice from John.

John: Yeah, and even though I do this every day, I still take notes. Because there's always something new coming out, you know, to, uh, to add. Always new laws, always new rules and regulations. You gotta love our government. I don't know how you do it. Whenever there's a change in government, there's a change in rules.

Yeah. So, he had to stay on top of that, um, especially as business owners. And 

Kacie: that's why it's really important to have relationships with somebody that knows what they're doing. Because, how many of y'all want to sit... And read through all of these changes. Not me, I got better things to do. For sure. So we'll, we'll partner with you so that you can do it.

Yeah. Yeah. 

John: Just tell us what to do. Let me go down those rabbit holes. Yeah. Have that fun. Yes. Quote unquote. Fun. It's not fun. 

Kacie: All right, so we've got this is gonna be a two part series Yes There's a lot to say a lot with taxes and this is something that every business owner whether you are selling products or services Whether you are just starting or you've been in business for a while This is something that all businesses need to know 

John: most definitely.

Yes It's not and it's not something that you need to you should be waiting for the last minute on tax season So the deadline is what, April 15th around that time frame every year, depending on when it falls. So you know, going to your tax preparer at on April 10th with a stack of papers, hoping that they can create miracles is the wrong mindset because they're going to look at you and then they're either going to charge you an arm and a leg, right?

Or they're going to say you get what you get at this point. Time to do an extension. Yeah, exactly. Very true. Yeah, so this is some stuff to help prepare. 

Kacie: And if you're like me, I haven't done any bookkeeping all year long. 

John: Mm hmm. Dun dun

Kacie: dun. I know, none. I have a system that's pulling in all of my transactions, but I haven't done any of, and I have all of my receipts.

I've been doing the things, I just haven't physically gone in and done the things. 

John: But at least you have the foundation. Yes. 

Kacie: Which makes it easier. Yes. Yep. So if you guys are like me and you're like, okay, what? It's November? Yep. I cannot believe it. I thought that it was... It's still October, a couple days ago.

Yeah, so crazy. And if you're like me and you just realize that, that means that tax season is coming 

John: guys. I saw your eyes get wide when you said, it's November. Yeah. I was like, oh my God, it is. 

Kacie: So quick. 

John: So quick. And you know, it's funny. I'm happy that you brought up that you haven't done any books, um, all year because that's our first topic.

Right. Our first things to prepare yourself for tax season is making sure that you've either set up a bookkeeping system or you're tracking your income and expenses on a spreadsheet, right? For you, um, smaller businesses just started, don't have a lot of transactions. You can use a spreadsheet. Track your income, track your expenses.

But if you're not doing that at all, at all, then you're setting yourself up for failure. You're 

Kacie: in trouble. Yeah. So we're going over, I don't even think we said what the topic is. We said taxes. We're going over five things this podcast and five things the next podcast to help your business get ready for tax season.

Is that right? Get ready for tax season. Okay, so five things this one. Get out your pens and pencils. The first one is bookkeeping. 

John: Yeah, so we're talking about bookkeeping and in bookkeeping. We're just talking about What you need to do to understand the health of your business That's what bookkeeping is for number one bookkeeping tracks Your where your money's coming in from your cash flow your revenue and also where your money's going out from your expenses So as a business if you're just looking at your bank statement every month And you're basing it off of the ending balance or when you log into your bank account and you're seeing, Hey, what's my available balance today to make your business decisions?

Then that's, that's a recipe for a disaster. 

Kacie: Yeah. Yeah. There's so many things we've done lots and lots of podcasts before on doing bookkeeping so that you know, your reports, your profit and loss statement, your cashflow statement and your balance sheet are the three that you need to get to know. 

John: Right.

So setting up your bookkeeping system properly. Um, connecting it to a bank account, or if you're using a spreadsheet, um, tracking everything you do throughout the month. And then at the end of the month, matching your bank statement to your spreadsheet, then you're setting your. You're, you're, you're, you're, you're setting the process in place to help the other things fall into, fall into place, right?

Your financial reporting, all those reports you need to look at to make those strategic business decisions. You're setting that foundation up. So if you don't have a bookkeeping system or a bookkeeping process, that's number one. 

Kacie: And I know it's not fun, y'all. 

John: It's not. It's not fun. No, it's not. I would 

Kacie: rather clean toilets, honestly.

John: Yeah. Because, you know, who, who likes bean counting? No. Right? It's like you're counting 

Kacie: beans. Some people like it. Some people like the books and the matching and all the green check marks and all the things. I mean, 

John: there's an industry. Yeah. I'm in it. Not me. I'll 

Kacie: clean the toilets. Yeah. 

John: If I had a choice.

You know what's funny? I'm in the industry and I'm not the, I'm not a huge fan of just one, two, three, four. I use, I use programs. Yeah. Yeah. Use the tools and resources at my disposal. Because yeah, anyway, set up the process and you'll be fine. Yeah, so bookkeeping is number one. Yeah, now, now that you have bookkeeping set up, right?

Or you're going to set up bookkeeping and you're going to track it. Bring yourself up to date on your categorizations so that the categorizations is where I was saying where you're tracking your revenue and you're tracking your expenses, right? A category is where you put it in. It's like buckets where you put the buckets, um, for your business in and expenses.

You have buckets of expenses. You have your rent. If you have a location, you have rent, you have utilities, you have insurance. Um, if you use subcontractors, you have subcontractors, if you have to buy inventory, office supplies, like all that stuff, those are all buckets. So as you make a purchase, you say what bucket that purchase goes into.

That's your category. That's the part I haven't done. Yeah. But it's set up automatically to, the system actually gets smart after a while and will anticipate the buckets. So if it'll, and then it. It makes it easy for you at that point because it's it's seeing your history and it's anticipating where it's supposed to go So now I get to do is say yes or no.

Yes. No and put it in where it belongs So that's the bookkeeping piece, but that's gonna flow into the next step, which is running your financial reports Okay, 

Kacie: your financial reports and this we should be doing every month every other week at the minimum regularly Yeah Categorizing your Stuff, then you don't know what your statements say, which is dangerous.

Exactly. 

John: Yeah. Yeah, because, um, when you run financial reports, and I'm going to talk about two only, when it comes to tax planning, right? Um, there's reports you can run that just to help you make strategic decisions, but this is particularly just for tax planning. You want to be able to run what's called a profit and loss statement and a balance sheet.

And the two separate reports, a profit and loss statement, tells you where your money is coming in, your revenue. And where you're spending money, your expenses, right? So that's like your operational account for a particular amount of time for a particular amount of time. So you can do it from January to where are we?

November. You could, you could run one from January to November and it'll tell you how well your business has done in managing your money, your revenue and your expenses. 

Kacie: It's good to do this too, month to month to see if you have any. You know, especially if you've been in business for a couple years, you can compare this year to last year, this month, how did we do, it's a great way to see how your growth is, compare your, your expenses, are we spending way more and making less compared to last year, so that's a very valuable report, not related to taxes, but there are so many other things.

John: Oh yeah, like these reports are not just tax reports, you know, they're not just for tax purposes. Um, these two are. To give you an idea of what your tax situation is going to look like, but these are made for strategic decisions, right? You want to run these reports to understand how healthy your business is.

So if you need to purchase another piece of equipment, you can say, Hey, yeah, we're making money here in this area. So it's a good idea to make a purchase, right? So it helps you make all other decisions as well, but categorizing your transactions properly, consistently. It allows you to run these reports, these profit and loss statements and balance sheets so that you know what to prepare for come tax season, because your profit and loss statement is going to have something called your net income.

That's your revenue minus your expenses gives you your net income. Your net income is going to say, depending on your business structure, you rocked it. Go you. Exactly. You made some money. Guess what? Now you got to pay Uncle Sam. So it can help you prepare for what your anticipated, um, tax payment is going to be.

Kacie: So if it says you made two million dollars expect to pay taxes. 

John: Yes. Yeah, most definitely If you have two million dollars in that income then we should be doing some strategic planning throughout the year To prepare yourself for that because that can be a major hit. Yes, 

Kacie: it can be yeah one thing And you're probably going to get into this but we get this i've heard this from Several business owners when it comes to taxes, they don't know that if you're selling products that you have to put sales tax aside and pay that monthly.

So they'll get caught at the end of the year having to pay all of this sales tax. Can you hit on that really quick? I know it's not related, but that's something a lot of businesses don't understand. Yeah. 

John: Well, let's just say this. When you, you, when you charge sales tax, that's not revenue to your business.

You're acting as a middle man or in today's middle person, right? So that's money that you, that the state is charging for you to sell a product or service depending on what state you live in. And there's a percentage. So it's depending on what state you live in, it could be anywhere from like 2 to 10 percent or more.

Probably California, who knows what it is over there. But it could, you know, that percentage that's added on to your sale price. That's money that you should be taking immediately and putting it to the side because typically on a monthly basis You're required to file a sales tax report with your state and send that money to them.

That's just a transfer So you're grabbing it from your customer and you're giving it right to the state. Don't think it's money you could spend Oh my God, I've seen so many, so many clients get caught up in this mess. And then the state does not play when it comes to sales 

Kacie: tax. No, no. They're like, we want our money now.

Yes. Probably because there are so many businesses that don't understand 

John: it. Yep. And they'll shut you down. Wow. Over sales tax. They'll revoke your business license. Which means you can't operate without a business license like they'll they'll come after you for that sales tax money because it's not your money Yeah, like that they're expecting you to transfer that over Yeah But be wary if you have if you're starting a business or you're running a business that sells a product or service Verify with your state if you're required to collect sales tax from it.

Yeah, and if so, that's your big tip of the day Yeah, if so have an account Where you're putting that, where you're moving that money to the side immediately or there's programs that actually pay, do it automatically for you. Oh, that's cool. Yeah, as you, uh, you connect it to your bank account and your POS system and as you're selling something, like it tracks it and it automatically makes the payment for you.

So something good to automate. Cool. I'm glad you brought that up because you're right. I got you off topic. No, but it's so true. It's so true. You don't want to go into the end of the year with that hanging over your head either. Because not only will you have to pay that money back, you're going to have to pay Uncle Sam.

If you have net income, you have to pay Uncle Sam that money too. And it's just going to become like a whole... A big chunk. A whole, what do you call those things? Landslide. Yeah. Snowball. Snowball effect. Yeah, it's tough. Alright. So you ran your financial reports because you categorized properly, right? Now, um, it's a good time when you're running that stuff to say, maybe I'm not in the right business structure.

Kacie: So business structure, so you mean like, um, a corporation or an LLC or a sole proprietor? Yeah. 

John: So the majority of businesses, the majority of small businesses are sole proprietors, right? I think it's like 90 something percent. Oh, wow. Really? Yeah, start out as sole proprietors And then you have LLC's and then you have corporations.

So S corps or C corps. You have those types of structures. They're all Taxed differently. Well for the most part They're taxed differently. So you have a sole proprietor all that is taxed pretty much on your personal tax return so whatever your business makes You pay the tax on it and you're going to pay self employment tax and you're going to play pay income tax on that So there's two two types of taxes.

You have to pay as a sole proprietor Depending on the health and how much money your business makes at the end of the year The same goes for like a single member LLC They get taxed the same as a sole proprietor It's all on the schedule. It's called the schedule C and Whatever your business makes at the end of the year gets transferred to your personal Return, and you pay that tax on it, and you pay self employment tax, and income tax on it.

Bleh. So if you have a lot of money left over, maybe it's time to say, maybe I should change my structure. Yeah, okay. Maybe there's another structure out there that's better for my business. Because 

Kacie: then you're just gonna have to pay all of this, all of this stuff. Correct. So what would a better structure be if you have money left 

John: over?

There's uh, S Corporation. Okay. So if you're a, um, you know, an operationally heavy business where you have sales, you're selling products or you're selling services and you're getting a lot of revenue from that, you can um, and let's say you're making over 50, 000 net income, instead of paying self employment tax and income tax on all that money, if you were a, an S Corporation, you can put yourself on payroll.

All right, grab a check throughout the year pay your taxes throughout the year and then whatever is left over is called a Distribution and all you don't pay self employment tax on that distribution. You just pay income tax so you're Minimizing how much self employment tax you're paying throughout the year That's where the big savings are is the on the self employment side of the tax, which is fifteen point three percent Wow Yeah, so whoo Yeah.

So if you're looking at your numbers, you did your proper bookkeeping, you're running your financial statements, you're seeing that you have a net income of like 50, 000 or more, that's a time to say, Hey, let me reach out to John, right? And say, Hey, John, I might need to look at my structure here. I'm going to get hit with some taxes.

Um, we may or may not be able to do something for that tax year, but, um, um, we can definitely prepare for the next year. Right. So at least you understand what you're getting yourself into. If you're a sole proprietor, you're kind of stuck. You're stuck with that tax because you would have to change your whole business entity to become a corporation.

Oh, yeah. Okay. In LLC though, you can elect to be taxed as an S Corp. Oh, interesting. Yeah, that year. So we can do it like an S, uh, an election for an S Corp and then run one payroll where you pay the tax in For that, for the money that you've withdrawn throughout the year and then all you pay is a income tax on the remaining distribution.

There's a whole strategy that can be discussed around that. So if you're looking at it, it's raising eyebrows, have a conversation. Yeah. 

Kacie: Or, if you're listening to us and already falling asleep, then just call your accountant or find a good accountant near you or call John and then just say, Hey, this is my situation.

Can you please fix it? Yeah, 

John: exactly. Because you, you want, you know, you want a partner. If you're making money in your business, you need to, you need to. Put the right partners around you to help make sure you're saving money, right? You want to make sure you're building that partnership. So run your reports, categorize your stuff and say, Hey, look, it's time to bring somebody else to give me some strategy and some tips to help run this business.

Right. Yeah. We actually knocked out two points with that last conversation anyway. Okay. So we knocked out the structure and we knocked out self employment and income tax. Okay. So we hit that too because you want to prepare yourself to say how much am I going to owe at the end of the year. You know, if I made 30, 000 at the end of the year, I know I got to pay self employment tax plus income tax on that money.

So run your reports so that you can prepare to say how much I'm going to, I'm going to have to pay at the end of the year. Yeah, this is. Heavy, heavy, heavy, but it's important. So important. And then I'm going to hit one more that I'll put us at five for this one. Okay. Right. So here's a good, here's a good tip.

If you know that you're going to end the year with a lot of money and you have the opportunity to delay some income into 24, Don't, so let's say we're in December. We're approaching December. You already hit the 50, 000 mark, right? But you have another 15, 000 in receivables that are supposed to hit in December.

Don't bill them till January. 

Kacie: Yeah, say hey guys or build that, bill them in December 31st. 

John: Yes, and let that money come in in January. Yeah. So that way, you know, if you can do that, right, if you need it to operate, that's a whole different story. Um, you probably don't have that kind of net income anyway. But if you have that net income and you can delay some, some money coming in to save your tax burden, delay it into 24.

So 

Kacie: one common thing that I hear from Most accountants that I've ever worked with, and I think even all the gurus online, they say that if you have a big, a lot of money left over, you gotta spend money. Can you talk on that? Because that's a lot, that's a big thing. It's like, oh, you got all this money, go spend money, go buy a truck or go buy equipment or whatever so that you don't have to pay 

John: taxes on that.

Yeah, I think there's so many other things you can do if you have a lot of money left over than just buying something that your business doesn't necessarily need. Yeah. Right. Why would you buy something your business doesn't need for a tax deduction? Because a tax deduction is not dollar for dollar.

Just because, you know, you buy an 80, 000 vehicle and you can deduct, let's just say up to 80 percent now of it. That's, uh, you're not gonna, it's not a dollar for dollar. on your net income. You only get a percentage of that. So, um, you have to make the right decision for your business. Is this something that your business can utilize or are you just putting yourself in a situation where you've got this, this vehicle now, guzzles all this gas that is just providing more of a headache than a benefit, than a benefit just because you wanted a deduction.

Kacie: Deduction. Yeah. So what's a better way to do 

John: that? Uh, investment, investment, retirement. Um, I would say, Investing doing some retirement planning. Yeah, and that's a next week's we'll get into that one the next week Okay, but um, yeah, there's definitely other strategies you can look at Maybe it's a good opportunity to hire another employee, right?

Get some more people on your team or, or, or, you know, an opportunity to expand your business in a way where you can get another location because you're doing so well. Maybe you want to expand the business. Instead of buying something that's not necessarily going to benefit the business, buy something that's going to help the business grow.

Yeah. Do 

Kacie: some marketing because that's going to help 

John: you grow next year. Yeah, exactly. Because you can have a great year, but if you're not investing in marketing going forward, You know, you're that year can be the only good year you had and then you're not ready, you know The next year looks like what happened?

Yeah, so I think that was one two, three, four five five. 

Kacie: Those are five for this week. Those are good 

John: stuff That is good stuff. It may be boring But I'm telling you right now if you don't prepare for tag season, you're gonna be surprised Uncle Sam comes for that money. The moral of 

Kacie: the story is, don't go to your accountant the day before tax, the week before tax.

Your taxes are due with a bunch of junk and say, fix it. It's not going to happen. Do it now. You got plenty of time. Start the 

John: communication process early. Don't wait to the last minute. This is something you definitely want to have throughout the year, honestly. I mean, 

Kacie: if you're keeping your books, doing your categorizing, just spending a couple hours a week, even a couple hours a month probably is all it takes.

Maybe an hour a month is really all it takes. And if you're spending that throughout the year, You should really be ready to do your taxes in January. Sure. How cool would it be to do your taxes in January and get it all over with? Be the first one before your accountant's all stressed out. Yeah. And just get it done with, then you don't have to worry about it.

John: Yeah, plus you'll make your accountant happy. Like, they'll end up being your best friend. Yeah. Somebody they'll want to, they'll want to hang out with you. Yeah. Instead of like, oh here they come now. Something to think about. Yeah. All right. So we'll see you next week. 

Kacie: Cool. See you next week. More tips. Five more tips next week.

John: Peace. Bye.