Main Street Business

#561 The Step-By-Step "Zero-Tax" Blueprint For Business Owners

• Mark J Kohler and Mat Sorensen

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In this episode of the Main Street Business Podcast, Mark J. Kohler shares the blueprint for tax-efficient business ownership. He explains why smart bookkeeping is key, how to leverage deductions, and when to transition from an LLC to an S corp for optimal tax savings. If you’re tired of overpaying the IRS, this episode is a must-listen!

Here are some of the highlights:

  • Mark explains what you take out of your business is not what you are taxed on, using a scenario where a business owner makes $60,000 but is only taxed on $50,000 due to write-offs.
  • The evolution of a small business from a sole proprietorship to an LLC, and then to an S corporation once the business starts making significant income.
  • Mark discusses the concept of having two sets of books: one for tracking income and expenses through the business account, and another for adding other expenses that may not have gone through the main account.
  • The concept of phantom income, where business owners reinvest money back into the business and are still taxed on that amount.
  • Strategies for minimizing phantom income, such as taking a portion of the reinvested money and depositing it with the IRS to cover expected taxes.
  • How most small businesses should avoid the C corporation structure and stick with pass-through entities like LLCs or S corporations.
  • The importance of tracking every expense related to the business, as these expenses can be significant tax write-offs.
  • Mark advises business owners to involve family members in the business to take advantage of write-offs for supporting family financially.
Speaker 1:

Welcome to the Main Street Business Podcast with your distinguished hosts, mark J Kohler and Matt Sorenson. Both are best-selling authors and have over 25 years of industry experience, with 10,000 client consultations, making them the leading tax and legal experts in the nation. Together, they'll unpack the most complex tax, legal and financial strategies crucial for saving more, stressing less and building generational wealth. Today they're your personal advisors, ready to break it down for you and make the tax and legal game easier than ever.

Speaker 2:

Here is Mark and Matt. Welcome back everybody. Today we're going to walk through the routine of how you get paid as a business owner in the most tax-efficient way. I mean you get paid daily, weekly, monthly or at the end of the year, but we're gonna do it like the wealthy. Now. I am a licensed CPA attorney, bestselling author and an owner of multiple tax and legal businesses, and I've helped thousands of business owners over my career, structure their finances and business to maximize income without the worry of the IRS looking over their shoulders. Now, look, we all know how important it is when and how we get paid or that payday as a business owner, but it's going to vary from business owner to business owner, and it's also easy to feel that you don't have the time or expertise to make the necessary changes to minimize taxes on the fly. That's why your structure and procedure is so important and just needs to be automatic. That's why, in today's video, we'll be breaking down in simple steps how business owners should set themselves up to get paid whenever that is to minimize taxes at the end of the year and can start implementing this right now for you in your own business.

Speaker 2:

Let's get into it Now I want to teach five concepts or points here. Some of them are going to have an action item, some of them are just critical. That you understand, because if you have an understanding of how the game is played, it's going to help you execute on the field a lot better. Concept number one what you're paid out of your business is never what you're taxed on. Allow me to explain.

Speaker 2:

Let's look at two different scenarios. Option one you're making $60,000 in your business, $5,000 a month. That's what you're taking out of the business. Well, that's not what you're going to get taxed on. Mark, what in the hell are you talking about? That can't be true. Let me show you. Let's go to the whiteboard. Okay. Option one you have $100,000 of income in your business sales, whatever it is. Okay, $100,000. And then you have $40,000 in write-offs. So we're going to put expenses Now this could be expenses you pay directly right out of your business.

Speaker 2:

It could be marketing, it could be legal, it could be supplies, it could be vendors, it could be vendors, cell phone, whatever, okay. And it adds up to $40,000. Okay, so you net $60,000 and you take that out of your business and maybe it averages to about $5,000 a month. Now here's an important point. As a business owner, you can take money out anytime you want. You don't have to write yourself a paycheck, take a paycheck 1099 yourself, or whatever it's called draws. You just take money out anytime you want Day, week, month. That's the cool part. As a business owner, you control the checkbook. So you take out this $5,000 a month times 12 and you're at 60K. All right, cool, guess what? That's not what you're taxed on.

Speaker 2:

So let's put in red what you really are taxed on, because what we're going to do at the end of the year is we're going to add in some other expenses that maybe you didn't pay for out of the business. Oh, Mark, I had home office in here for an extra $3,600 or $300 a month. Oh, and I had some mileage on my vehicle and when I ran the numbers of miles times the annual rate, there was another $4,000 in miles on my truck. Oh, my gosh. And then, over here on my personal debit card, I went to Costco and bought a new printer or one of those cool whiteboards for $2,000. And then the list goes on and on, right.

Speaker 2:

So we want to dig up these extra expenses that are related to your business that maybe didn't go through the main business account, and that's okay. So what we're generating is a second set of books. You may have seen movies like this you got two sets of books. Yeah, there's nothing wrong with two sets of books. You got the main books to. With two sets of books, you've got the main books to track your income and expenses that go out of the business account and you take money out whenever you want. That's cool, whatever you leave in the account or not. But then at the end of the day, we're going to add up all the expenses that went through the account and anything else we can think of that may be a non-cash expense.

Speaker 2:

Now we also have to be careful that we can't throw in the kitchen sink. We can't throw things in that are not related to our business. But we wish we could write off Classic. I want to write off my clothes, mark, because I have to look good on YouTube, and I need to write off my clothing and my new Rolex watch, and I want to write that stuff off because you know, I got to look good. Sorry, the IRS does not allow that as a write-off. Oh well, I want to go write off all the dining with my spouse because we go out to dinner a lot and talk about business. The IRS is like nah, you can't write off every meal, especially when you go to Pizza Hut to talk about your business with your spouse, but we can write off a few meals, oh, and then, oh, another classic one. Well, mark, I had to wrap my car, that Lamborghini, with all this cool logo and color and all this and my phone number, so I can write off my whole vehicle. No, you can only write off the mileage. I can't write off your car just because you put a cool vinyl wrap on it.

Speaker 2:

So what you're going to learn is there's things you can write off and things you can't write off. We're going to come to that in one of our other concepts. But in this example, what we're trying to show here is your income came in, your valid expenses went out, and then there's these other expenses we're gonna add onto the books at the end of the year. So in this example, we've got another nine $10,000 in write-offs that really didn't go through the business bank account. So your net income we're going to subtract that other $10,000. And guess what? You're only taxed on $50,000, even though you took out $60,000. People. This is the trick the wealthy use. You're not taxed on what you take out of the business, because we're going to drum up every cool write-off we can throughout the year and that justifiably relate it to our business.

Speaker 2:

One last example that might rock your world I want you to have an annual board meeting. I want you to put your best friend, your mom, your brother, your sister, your kids, whatever on your board of directors and you're going to take a trip once a year to have an annual board meeting and we're going to write off airfare and dining and everything related to that legitimate board meeting. That could be another five $10,000 that you take as a write-off and then you pay less tax. Right here In this example, you can see it in red. That's what the wealthy do. Why do you think they have private jets? Why do you think they travel to cool hotels to have their meetings? Why do you think they have cool, kick-ass equipment in their office or at home, or an awesome cell phone or a cool drone or a cool tripod? Because it's all a write-off. Everything you see in this room is a write-off. I'm going to put it on my books, no matter how I pay for it. That is a trick of the wealthy.

Speaker 2:

Now I also need to warn you about what's called phantom income. This can work against you and we're going to talk about now. Option two real quick, and this is all related to how you pay yourself as a business owner. Option two you make the same $100,000. All right, cool. I take the same $40,000 in write-off and maybe even over there. We take an extra $10,000 in write-offs of stuff we figure out later that we could have written off and we do it at the end of the year Same thing as option one and at the end of the day, you have $50,000 of net income but you didn't take out 60,000 in draws.

Speaker 2:

You put that 60,000 in draws back into the business Because you're like Mark, I got to expand, you're scaling, you're leveling up, and you're saying I got to take that 60 grand in draws from the first example and really invest back into my business. I'm going to buy a better studio, I'm going to buy more inventory, I'm going to invest in things that are kind of capital in nature to help my business grow. Well, some of those expenses may not be a write-off. Here's an example. Let's say I'm going to go to a Tony Robbins event or go to a personal development event that is really really important for my success in life, maybe not directly related to my business. Well, the IRS has special rules about this that unless it's specifically about your business or helping specifically about your business, or helping you build your business and I'm not saying Tony Robbins and some of his events couldn't be a write-off, but I'm just saying something that's truly personal development from an IRS perspective but you think is a freaking awesome write-off. So in our example, maybe some of those special events were not a write-off and they have to stay down here. They can't go up above. We wish they could.

Speaker 2:

Here's another example. The IRS says oh, you're going to do that board meeting that Mark just talked about. That's great, but if you do it on a cruise ship, no write-off, because people would take cruises to do their board meetings and abuse the system. So about 20 years ago, the IRS passed a special rule and Congress got behind it. You cannot write off a cruise as a business expense, even though you may have your board meeting on it. It's just one of those rules. And a couple other quick examples Entertainment used to be a big write-off before the Tax Cuts and Jobs Act in 2018. We would take people out to the country club or go to a baseball game or go to a Broadway show and you could write off half of it as business development if you were there with a client or a customer, a vendor, an employee. Well, that expense is now gone. So you may feel like you need to do that to network and build your business, but you're not going to get a write-off for it.

Speaker 2:

And finally, inventory is the classic one. Look, I've got books here behind me and I've got out here in the closet or on the shelf, hundreds, if not at times thousands, of books that I pre-buy from my publisher and distributor to take to my events and to sell to clients online and some of you already own my book. Well, when I go buy books, it's not a write-off until I sell it. It's called cost of goods sold when I sell it. So if I'm buying inventory in my business but I haven't sold it yet, it's on the books as if it's cash, it's an asset. It's not a write-off yet.

Speaker 2:

Now, with all that said, hopefully you got the point that you could be spending money on your business, putting that money into your business but not putting it into your own pocket. Well, at the end of the day, back in our example, you're still taxed on $50,000. You still have to pay the tax because you chose to put that money back into the business. That may have not been a write-off or not one yet. So I have a lot of clients that will go Mark, I'm getting taxed on money I never took out of the business and I'll say well, you kind of took it out of the business, you just put it back in and didn't get a write-off for it. Now that's okay because you're scaling your business. You're growing your business, but you just have to know that's coming Now.

Speaker 2:

One of the strategies the wealthy use and I've taught this over and over again to them one-on-one and in conferences is we kind of have to guesstimate. We have to say well, you know what, I'm going to reinvest that $50,000, $60,000 back into my business, but I'm going to peel off 25% or 30% of it to pay taxes. I just know I'm going to reinvest $40,000 back into the business and take $20,000 and deposit it with the IRS. So now I'm protected. So come April I'm not caught. You know, parenthetically, we know where, without money to pay taxes, I peeled off the amount I need for taxes. I knew I was going to have phantom income and I reinvested the proper amount so that I'm protected. So point number one in this whole process is I want you to take out money when you want. I want you to pay yourself as a business owner and we're going to take extra write-offs wherever we can throughout the year. But if you ever reinvest money back into your business or leave the money in the business because you need more money in the bank account for expansion, just know you're going to have to pay the IRS to do that. You want to just peel that tax off the table and the beauty is, once you do peel that tax off, that money is now after tax. You'll never get taxed on it again. You're using that money in the business to grow. So bottom line phantom income is the income you chose to leave in the business. We just need to peel off a little bit for taxes in order to do it.

Speaker 2:

Now, guys, before I go to concept two, some of you may be like man, this is a little deeper than I expected. I wanted some little fluffy video on what the wealthy do. Well, you want to know what the wealthy do. They geek out on tax strategies. They know the number one cost in their life are taxes. Wealthy people can read their tax return. Wealthy people love to meet with me because they know I save them freaking money every time we talk. So now that you have this concept, you're playing at a whole other level. You can go to a dinner party and go. Yeah, I've been dealing with my phantom income, dealing with my tax deposits. Some wealthy person will go. Well, man, you know what the hell you're talking about and you just elevated yourself. You want to be wealthy do what wealthy people do?

Speaker 2:

Concept number two actually quite simple and straightforward, but I answer this question so often on this journey of paying ourselves. We have to cover it. Concept number two do not use the c corporation. A c corporation generates a double layer of tax and there's a lot of I almost call them scam artists or uneducated out there that try to sell the c corporation to small business owners and then, to add insult to injury, they try to talk you into setting up in nevada or in wyoming, or people always get a second opinion when you're being pitched on that and be careful. Now let me just show you what this means and then we'll move on.

Speaker 2:

So on the whiteboard here we've got A and B. A is what we just talked about. It would be an LLC or an S corporation. Your 100 grand came in, your 40 went out and we had this 50 or 60 grand and we just talked about that. That's called a pass-through entity and that's what 99% of small business are.

Speaker 2:

But there's some people who get sold this C-corp strategy which we have to unwind. It's very painful and very expensive. So I'm just forewarning you in this process of paying yourself, don't get sucked into this trap In a C corporation. What happens is you make the same hundred grand and then take the same expenses. But when you make that profit now you're paying corporate tax corporate tax of 21% and then you're paying yourself it on your personal tax return. You're going to be paying an additional layer of personal income tax. This double tax is a nightmare and there's going to be people out there that make it sound super sexy, saying corporations pay a lower rate and you can leave the money in there and then you can borrow it out or you're going to get paid somehow someday. I'll just tell you. It is a ticking time bomb. It is very rare that we use a C corporation ever for a small business owner.

Speaker 2:

So the moral of the story here is you're going to pay yourself, take money when you want, we're going to drum up tax write-offs, be prepared for phantom income, but we're not going to worry about the C corp strategy and get sucked into some sort of pay yourself in some weird way with a different fiscal year end or all that. Stay away and please know I'm coming to you as a person with 25 years of experience as CPA and attorney and if someone approaches you with this strategy, beware and just know, if I thought this worked, I'd be using it. Any strategy I can to help my clients, I would be doing it. So there's a reason why I don't. It's not financially sound.

Speaker 2:

Concept number three use the LLC as the starting point for your business structure. Now let's unpack this, and the key word in that concept is the starting point. The S corporation is going to be ultimately where you go. If you're making money, we're going to be using an S corporation, but the LLC allows you to make that transition quickly, efficiently and affordably. Next point LLCs do not save taxes. Llcs give you protection and the ability to save taxes quickly when the time comes.

Speaker 2:

So let me take you through the evolution of a small business owner from side hustle to main hustle. Typically, the first stage a client starts out with is a sole proprietorship. The minute they think I've got a business idea, we're starting to capture expenses. These are going to generally be called startup costs. I want you to be tracking any expense that you're having as you're thinking about your business idea. This sole proprietorship is stage one. Now you may make some money in this stage. You may not. But a sole proprietorship is simple. It's easy. You don't have a bank account. You're just kind of again in this startup mode. But if any of you have started to make money with your small business and now there's 40 million Americans with a side hustle or getting a 1099.

Speaker 2:

You're now beyond that and where I want you at stage two is an LLC, a limited liability company. Now, it's not going to save you taxes, but it's going to provide a foundation. You're going to have a tax ID number, you're going to have a bank account and you're going to start setting up a set of books and you're going to start getting used to having a business. This LLC is where you're going to collect your income and start paying expenses and get used to debit cards and credit cards and tracking your net profit. But the minute you start to make more than $50,000 net kind of back to that $4,000 or $5,000 a month concept. If you're paying yourself $4,000 or $5,000 a month concept. If you're paying yourself $4,000 or $5,000 a month.

Speaker 2:

We got to talk because we would want to convert you to an S corporation. Now an S corporation. This conversion simple and easy. I think we charge $300 at our law firm to help clients make this conversion. You're going to keep the same EIN, you're going to keep the same bank account, the same set of books, but you just change the nature of your business to this S corporation, think small corporation.

Speaker 2:

Now, why would we do that? Well, let's talk numbers. So let's say you make that same $60,000 that we just went through. You have a hundred grand, come in 40,000, go out and you net 60. Wow, that's great, wonderful. Maybe we carve out 10,000 more in write-offs and end up at 50.

Speaker 2:

Just stick with the example. I net 60 grand, I'm taking home $5,000 a month and that's the bottom line. There, that's pretty powerful. Well, you're going to pay self-employment tax of 15.3%. There, that's pretty powerful. Well, you're going to pay self-employment tax of 15.3%. That's going to be $9,000 in tax before you even get to Fed and State. So kind of a big deal. You're getting taxed almost three times.

Speaker 2:

Well, when you convert to the S corporation, we're going to take that same income, same expenses, same net profit. But we're going to split it and we might split it into two pieces. We might take $30,000 as self-employment income or a W-2, and the other 30 grand we take as pass-through, where it just comes out as a draw, kind of like we talked about in paying yourself to begin with. Well, the beauty of this is, I only pay that self-employment tax on the 30. So I just cut this tax bill in half. I saved $4,500 by simply becoming an S-corp. Is that easy? Now, every dentist, doctor, landscaper, realtor, restaurant owner, online influencer, attorney, cpa we're all S corporations.

Speaker 2:

The minute you start making more than $50,000 a year, we want to make this change. Now, did you change the way you pay yourself? Nope, you still take money out anytime you want, any day of the week and on Sunday, and we're going to continue to track our expenses, which we're going to come to in a moment. But all of this process of paying yourself can be either in the form of an LLC or an S-corporation, and when you change to that S-corporation, it's going to save you thousands in what we call the F-word FICA. What the FICA we hate? Fica, social Security and Medicare. You're going to learn more about this as you elevate your business and become a more successful business owner. So this is maybe the first time you've heard this concept, but you want to take advantage of this as you expand your business.

Speaker 2:

So, bottom line, having a business structure is super important, and I don't think the LLC is the get-all end-all. I would like you to be an LLC now, and later in the year we might backdate it to an S corporation, and as you start to work with a tax advisor to help you along this process, you're going to be empowered and have the right tools to be nimble and pivot as you need to with your tax strategy. And what this means is that you can operate as an LLC and then later in the year, we can look back at it and go okay, how are we doing? Do we need to make a retroactive S election? That LLC gives you the flexibility to do that, so as your profit goes up throughout the year, we can know that oh, I got a plan and I'm not going to get caught. If you don't have an LLC, I can't do that Now.

Speaker 2:

Concept number four, pretty straightforward but worth mentioning, is track every expense related to my business. Now, as I talked about earlier, there's going to be expenses that you're just not allowed to take that might help you in your personal life or just help you live personal expenses like groceries or rent. But there's also going to be expenses that you can write off, and the more educated you get on these types of write-offs, the more powerful you're going to be. This is what the wealthy do. When I talk about geeking out on tax strategies, this is it. So let me just rattle off a few that I want you to be thinking about. Some of them would go on your book, some of them you just need to know about to strategize throughout the year with your advisor Home office something that we're going to book later at the end of the year, but something you may not pay for Auto mileage.

Speaker 2:

And this is going to be on every auto you might drive in your family of vehicles. It could even be a motorcycle or an RV. Any vehicle you have will at least take the mileage. We might even do actual and write off the fuel, repairs and maintenance in the vehicle itself under depreciation, but you're going to strategize per vehicle with your advisor. Third, I want to write off all of your electronics cameras, cell phones, drones, tripods, tvs, monitors, computers, ipads, laptops anything related to your business at all. Charging cords, anything, speakers, microphones, anything at all related to your business at all. Charging cords, anything, speakers, microphones, anything at all related to your business. Again, that's gonna help you. This is where the concept of having social media in your business is so important because all of those electronics need to support your marketing plan, so those are gonna be a write-off.

Speaker 2:

Number four you're gonna be wanting to write off travel, any travel for business at all airfare, airbnbs, uber, taxis and any trip you do take. I want to try to find a business purpose for that Dining. I love dining. Anytime you meet with a client, a vendor, an employee, a business partner and you break bread, have food. Even if you pay for only your portion, that could be a write-off. Or if you pay for everybody, it's a write-off. And this includes the bar tab. And then just let me add when you're traveling, you don't even have to be with someone to write off dining while traveling if you're traveling for business.

Speaker 2:

Next, family members. Oh, I want to make sure that if you're supporting children under age 18, over age 18, parents anybody in your personal life that you're helping out financially, make sure they have a role in your business. It could even be on your board and the money you're giving them is going to come with a 1099 in their Christmas stocking, and that's a great way to take a write-off for things you're paying for, but you haven't put it on the books as a write-off. This is where, with kids under age 18 helping in your business, no longer are you paying for school lunch, school clothes and soccer and piano lessons. They're paying for it. You're getting a tax write-off to pay them to pay for those things.

Speaker 2:

Medical oh don't even get me started there. What type of medical strategy do you have? Are we writing off your health insurance premiums? We better be. Are you funding a health savings account? Are you doing a healthcare reimbursement program? I mean, any medical expense that you have after insurance should be a write-off in some way, shape or form. And if you're a business owner, it is far easier to do that. Now, don't even get me started on real estate, because when you start investing in real estate or even buying your own location to rent back to your business, oh my gosh, we want to unlock long-term rentals, short-term rentals, syndications, self-rentals and unlock depreciation. That could be a huge write-off in your personal investing as well as your business. Well, and let me just say I have a 30 ultimate guide of different tax strategies that just get the process started. There are so many strategies business owners don't even see coming, and that list I just gave you it just scratches the surface. So, bottom line, as a business owner, I want you thinking about any expense you can to write off in your business, tracking it and talking about it.

Speaker 2:

And concept number five is pretty simple and straightforward, but probably the most important of all People, you are the captain of your ship. You need to be engaged with your tax advisor Not preparer, not accountant tax advisor Making sure you're meeting on a regular basis and especially at the end of the year Engaged and talking about your tax advisor. Making sure you're meeting on a regular basis and especially at the end of the year Engaged, and talking about your tax return. Geeking out on a podcast maybe my podcast or other shows or YouTube channels that talk about tax strategies. This is the number one cost in your life and you've got to be engaged in it. And let me just little secret knowledge here. Got to be engaged in it and let me just little secret knowledge here.

Speaker 2:

It's easier to save money than make money. This is fun stuff. Play like you're shopping at the mall, looking for deals. That's what I want you doing on your tax return as a business owner shopping for deals. And as you start to get more educated on this, you're going to understand what this does for your long term wealth. When you start saving taxes and then putting that money into Roth IRAs, 401ks, vehicles that don't pay tax at all, you start moving from a tax world to a tax-free world, and that's something else the wealthy do. We want to move in that direction with our business.

Speaker 2:

Now, if you're a business owner and you're looking for that tax advisor not to do it for you, but to owner and you're looking for that tax advisor not to do it for you, but to work with you and to build that relationship, please click down below.

Speaker 2:

And I have a network of tax advisors that speak Mark Kohler, trained on over 75 strategies, meeting with me weekly, coming to a semi-annual conference and certified as a Main Street tax professional.

Speaker 2:

Now, if you happen to be an accountant or a tax preparer, a lawyer, a financial advisor, and you're like, hmm, I'd like to be on that list and I also would like to learn those 75 strategies, mark, where's your community? How can I hang out with you and all of your team members that you're working with every week as well? Click down below. Please come, do a discovery call with one of my new member specialists and allow them to help you on your journey to be a true tax advisor working less, with more consistent income, enjoying what you do, less pressure and more job satisfaction People I feel like a matchmaker. There are so many business owners out there starving for a good tax advisor and tax strategies and so many accountants looking to build that tax advisory practice of their dreams. We can bring this together. There is a future in the tax industry for everybody to save money and build wealth and enjoy the process. Thank you so much for watching and I look forward to seeing you soon.

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