Your Business and the IRS Survival Guide with Sarah Holtrup

Your Business and the IRS Survival Guide with Sarah Holtrup

Your Business and the IRS Survival Guide with Sarah Holtrup

Sarah Holtrup is a CPA and a Certified Tax Coach.  She helps her clients in two ways – through tax planning and tax resolution. In tax resolution, she helps her clients fix their tax debt problems and get compliant so they can stop worrying about the IRS and the State Department of Revenue. And with tax planning, she helps her clients structure their activities, their income and their expenses, so that they pay the least amount of tax.

Please enjoy this episode with Sarah Holtrup!

1:30 – Who is Sarah Holtrup?

2:28 – How does Sarah help small business owners with their taxes?

3:37 – Give us an example of how a business owner can save on taxes?

5:59 – How hard is it for a business owner to change their entity structure? 

9:21 – What goes into planning a tax strategy that is best for a business owner?

13:31 – What happens when the IRS comes knocking on the business owner’s door?

15:22 – What are the common mistakes that bring the IRS to your door?

18:39 – What advice can you give to make the tax planning season easier?

22:35 – Can you legitimately save tax dollars for a business if they have been taking too much latitude with deductions?

25:28 – Are these tax planning strategies for small businesses, not just corporations?

27:06 – Do you do any work with business owners on the due diligence side of buying a business?

37:21 – Connect with Sarah

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Show Notes

Who is Sarah Holtrup?

Sarah Holtrup is a CPA and a Certified Tax Coach.  She helps her clients in two ways – through tax planning and tax resolution. In tax resolution, she helps her clients fix their tax debt problems and get compliant so they can stop worrying about the IRS and the State Department of Revenue. And with tax planning, she helps her clients structure their activities, their income and their expenses, so that they pay the least amount of tax.

How does Sarah help small business owners with their taxes?

You may not realize that you have a lot more control over how much you pay in taxes than you think. Because the tax code is actually a series of incentives for certain activities and business ownership is one of those activities that gets incentivized. The more you understand about the provisions of the tax code, the better able you are to leverage opportunities to lower your tax bill. And the first question asked is always, “Can I do this? Is this legal? Absolutely.” The ultra wealthy and Fortune 500 companies have been using tax planning strategies for decades to reduce their taxes. And you can use the same process to lower your tax bill.

Give us an example of how a business owner can save on taxes?

For small business owners, one big piece that we’re looking at and we’ll talk a little bit more about this is entity structure and how you can leverage that 20% pass through deduction? Or does it make sense to change your corporate entity type to be able to leverage that reduction in the corporate tax rate? So those are two areas that when we talk about tax planning overall, we’re really saying, “Are there ways that we can shift them to be able to push them into a lower tax bracket?”  And you can think of it this way, when a CPA is looking at income coming in, they either want to try to find opportunities to defer it, which means, I’m going to pay tax. I’m not going to pay tax on it now, but I’ll pay tax on it later. Or are there opportunities to be able to push it into a lower tax bracket? And one way that we can do that is by identifying deductions and expenses that can help push us down to a lower tax bracket. Because if a CPA can push them down from a 37% tax bracket to a 24% tax bracket, that’s a win all day long. 

How hard is it for a business owner to change their entity structure? 

What you have to remember is the entity or structure that you use for your business is so important, because it directly impacts the amount of tax that you’re going to pay. What’s forgotten is that different tax strategies favor different entity types. So it’s important that the entity form that you choose aligns with the tax strategies that are the best fit for you and your situation. Because when we look at the choice of entity, we always need to look at the state where you’re operating your business or where you own property first, because the states aren’t uniform and tax treatment or in the asset protection that they offer. And that entity type that you’ve had in place may have been really effective for a long time. But in the light of tax reform or changes in your business or changes in the environment, it may not really serve you the same way. So it’s always good to evaluate the structure that you’re using. I caution everyone before you go convert your C corp to an S corp to take advantage of the 20% pass through, or if you want to convert your S corp to a C Corp to take advantage of the lower corporate tax rate, or event to incorporate, it’s important that you work with your tax advisor to ensure that the best choice for your business long term. I recently had a client who made an entity change based on the recommendation from another advisor. And it saved her a whole lot of federal tax. But it created a huge state tax though. So it wiped out any really any of that federal tax savings.

For example, most of the companies that I see are either S corps or LLCs. And the older companies are all S corps and the newer companies are all LLCs, which is funny and and I’m reasonably certain that there wasn’t a whole lot of thought that went into the entity selection. But as far as converting is that a large undertaking?No, not necessarily. The important piece is you really just need to fully understand the ramifications with it. And you need to understand the numbers but more importantly, you need to use the right numbers in your analysis. Otherwise you can have some ugly consequences. But if you go about it the right way, absolutely converting ruining makes sense. 

What goes into planning a tax strategy that is best for a business owner?

There are a few pieces to it. And part of it is an overall analysis of where you started really from your tax returns. And we and so we look at the returns and see how you’ve been treating pieces. And then we have the conversations – Tell me about where your income is coming from. Tell me about your expenses. Tell me about your activities. And tell me about your activities outside of this business and I’m looking at so we’re really trying to look at everything in a holistic way. And from there, we can look and say, by doing tax planning, I think that we can save you X amount each year in federal tax and X amount and state tax. And, you know, we’re doing a high level overview And many of the actual strategies that we’re going to use will take into account once we start getting into those weeds. For the tax planning process, it’s not a one time conversation, this is really over a period of at least a year. And it’s an ongoing process. The biggest piece that I see for my clients is it’s a mindset shift. They’ve gone from taxes as an unfortunate consequence of earning more money, my business is successful, therefore, I’m going to pay more in tax, and that isn’t necessarily true. And so it’s shifting that mindset to start operating in a more tax smart way. 

So when you say how complicated is it? It’s complicated. It’s like everything is going to be a change. But this is going to be a welcome change because you’ll find that the rest of the process as you’re going through, it’s all a positive benefit. It’s putting you in a position that you’ve got more accountability. You have better control of your numbers and a better understanding of what’s happening to them. And there’s that second piece of that tax savings. What does it do? You can forget, instead of paying unnecessary taxes, you’re either reinvesting in your business, or you’re helping to build your family’s financial future. So, if you keep your eyes on the prize –  it’s going to be a little bit painful. But look at what you’re going to get in the end. It’s absolutely worth it. I have not talked to one tax planning client who’s regretted their decision.

What happens when the IRS comes knocking on the business owner’s door?

The biggest mistakes that I see are either you take deductions that you shouldn’t or you don’t take deductions that you’re entitled to, because you’re scared that it’s either going to trigger an audit or you’re taking too many deductions. You shouldn’t let the fear of the IRS keep you from claiming legitimate deduction. Because when you do that you’re leaving money on the table. But again, it is part of the tax planning process. That’s why it’s important to have an advisor who’s going to work with you to identify the strategies that your business may have to take.

And as part of that process, they’re going to work with you to understand the requirement. That way you understand what you need to do to make sure that you can take this deduction. And, you know, tax planning actually protects you In the event of an audit, because when you know what you can and cannot do, you design your activities, so that you’re following the letter of the law, and you’re compliant. 

And in that case, you can leverage every deduction or credit. So you can pay the least amount of tax. Now, in that example of what you came into the IRS comes knocking at your door. The first comment I make when you get that notice in the mail is don’t panic, though. Don’t panic, but don’t ignore that notice. And what I tell my clients, when you get a notice, you’re not responding to this notice, I’m responding to this notice. You want your tax advisor to handle this correspondence. You know, so much of what’s happening to the IRS is automated these days, and you have a lot of data that’s coming through and a lot of it’s matching. We recorded this on your return and the 1090 names aren’t matching. And some of these are fairly simple, but some are a bit more complicated. So that’s why it’s important to have that In with you as you’re responding to this.

What are the common mistakes that bring the IRS to your door?

The largest one we see is you didn’t report all your income. Either you had W2’s  and 1099 and incidents on my return. You’re going to get flagged for that. And the other part is, is that in just kind of a matter of principle, always record all your income, always report all your income. And that’s probably the largest one that we’re going to see some of the deductions. You know, it sounds like there’s a lot of, I think incorrect information out there floating around. I can take this to action or I can take that deduction. Make sure that these are not urban myth, that there’s actually some legitimacy and that deduction that you’re taking. 

You know what has happened after TCGA? A lot of the entertainment deductions were slashed. So there’s still that misunderstanding that, okay, well, if I show up somewhere in branded apparel at a baseball game that makes it automatically deductible now. I do remind my clients, there are still many great available deductions out there. Don’t waste your effort on the stupid ones that are going to get you in trouble. 

What advice can you give to make the tax planning season easier?

We have to keep accurate books and records or start to keep contemporaneous records. We’re supposed to be following corporate formalities first, to maintain documentation to be able to support our businesses expenses and If you don’t, not only can you get into trouble with the IRS, but you can unknowingly expose yourself to risk not only just with the IRS, but you can also potentially pierce your corporate veil, where your corporate protection is stripped and you become personally liable. So with that, though, what you’ve developed to protect yourself by incorporating has all gone for nothing. 

Many business owners don’t fully understand their responsibilities. They may have had an attorney or they use an online legal service to set up their corporation or their LLC. But they didn’t really understand what it meant and what they need to do. And what I find through the tax planning process, is my clients become a lot more organized because we walked through some of those formalities to help them understand. You can do this and you can’t do that.And this should also be an ongoing, ongoing process. That way, at the end of the year, you’re not scrambling. It should be a situation where every month you can pull a P&L every month. And those are so important, and that’s part of that tax smart process. And as you start thinking that way, it opens up even more opportunities for your business to pay less tax. 

Can you legitimately save tax dollars for a business if they have been taking too much latitude with deductions? 

Absolutely. Keep in mind which automation at the IRS comes into play. There’s so much that’s happening really behind the scenes, there’s kind of a new level of compliance that’s required, and every business owner needs to be aware of it. And, and even though you’ve probably heard the IRS resources are stretched, it means that you’re going to have more options. You’re also going to have a lot more correspondence on it, whether they’re focusing on one particular category where you’re seeing your meals and expenses were disproportionate in comparison to others. And they’re going to ask for documentation to support them. So, I want my clients to claim every legitimate deduction, absolutely. But I don’t want you to get in trouble by tossing things on there that, first of all, aren’t legitimate, and second of all, are going to throw things out of compliance. 

You know, I feel like my clients, we are setting everything up to a point where, if it is audited, we’re prepared. I mean, I never want it to happen, of course, but if there’s a question, we’re totally prepared and ready to respond. We want your records to be in that kind of condition. 

And there’s what you’re asking, when you’re talking about tax planning. It really is important that you work with an advisor who understands the code. And who can say, here’s what we need to do to help apply it and keep you out of trouble. The typical response that I hear is my tax preparer is so focused on preparing returns, they really don’t have the time and the prep, it really doesn’t encompass tax planning. They may be able to give you a couple pieces of advice here and there. But that’s not planning and planning as an overall shift and looking at everything you have to say, what can we re-strategize, reach out and find other deductions credits that you can use too. And usually what we find is that it’s an investment.

Are these tax planning strategies for small businesses, not just corporations? 

Absolutely. And I find that it really, it’s never too soon, and the best way that you can get started is by working with someone on the planning side, and it truly is important because by structuring your activities appropriately from the get go, and also understanding what you can and can’t do, you’re putting your business in the best possible trajectory for success.

Do you do any work with business owners on the due diligence side of buying a business?

It’s the statement that I share most frequently for my clients is like, “I didn’t know I should do this. I didn’t know I couldn’t do that.” And they didn’t have a good grasp of their business’s financial situation. And because they didn’t, you know, these are good business people, but they didn’t have the tools that they needed to be able to run the most successful and profitable business that they could. And that really affects the underlying value. And I could see it from a buyer’s perspective, I would be worried, “Are there some problems lurking around the corner? Are there going to be some surprises?” And really, I would see it as an opportunity to maybe buy a business at a discount. 

There’s some really great strategies that we can incorporate to help make sure that we’re building your business to the best value. Is that helping you grow your tax bill? And by doing that you’re enhancing the value exponentially, just with a lower tax bill plus the value that you’re adding. There is a myth that the more successful you are, the more you have to pay in tax, and that simply isn’t true. And, you know, there’s the second tip that you have a lot of control over how much you pay in tax. It’s just a matter of the tax planning is not for the wealthy, the ultra wealthy, the Fortune 500 companies it is for companies like ours. And really where it’s the most valuable is for companies like ours.

Connect with Sarah

Get her book, Your Business and the IRS Survival Guide – email Sarah (sarah@profitableinsight.com) for a copy

Schedule a consultation – www.profitableinsight.com

Website: https://profitableinsight.com

LinkedIn: https://www.linkedin.com/company/mercer-capital/