Episode 012: A Crash Course for Creating Tax Strategies


Have you ever had the sneaking feeling that your business is paying too much in taxes? If so, you aren’t alone. Businesses all across the country over-pay their taxes on their returns each year.

The most effective way to identify saving or deferral opportunities for your company (and to keep from spending more on your taxes than you need to) is to create a strategic tax plan before you file your taxes.

So once you’ve decided you want to make a tax strategy for your company—now what?

Paul and Kim meet up with Reed King, CPA and Kevin Patel, CPA on this episode of the Wrap to talk through what business owners should know in order to create a strategic tax plan before filing their taxes.

At the end of this podcast episode, you’ll be able to:

  • Recognize ways in which your state tax planning should be different than your federal tax planning
  • Identify which business expenses are deductible from the ones that aren’t
  • Know which documentation to use to inform your tax strategy planning
  • Identify the two basic steps of strategically minimizing your business’s taxes
  • Communicate the necessary information to your tax advisor in order to fully identify tax advantages and savings opportunities

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  1. There are a lot of outsourced services available, what does that look like specifically for financial/accounting services?
  2. What are some examples of the functions an outsourced accounting team performs?
  3. How would I benefit from an outsourced accounting team? (maybe use a client example here)
  4. Are there different levels of services that I could use?
  5. Who are good candidates for outsourced financial/accounting services?
  6. What industries do you see benefit the most from outsourced CFO or accounting services?
  7. How do I know when it’s time to outsource my accounting? (maybe use a client example here)
  8. What questions should I ask when looking for a strong outsourced CFO/accounting team?
  9. As we are wrapping up, what is one piece of advice you would give to a business owner if they are considering outsourcing some or all of their accounting duties?

Intro (00:00) – Welcome to The Wrap, a Warren Avery podcast for business leaders designed to help you access vital business information and trends when you need it so you can listen, learn and then get on with your day. Time is tight, that’s why our advisors have wrapped up today’s most timely topics into a podcast with actionable advice. Now let’s get down to business.

Paul (00:22) – Hey Kim.

Kim (00:23) – How are you?

Paul (00:24) – I’m doing good. How are you today?

Kim (00:25) – I’m great. Terrific.

Paul (00:27) – We’ve got a good topic today with a Reed and Kevin looking forward to it.

Kim (00:31) – Yeah, this is getting towards the end of the year and time to really start focusing on everyone’s favorite topic, tax returns –

Paul (00:44) – Not mine. Glad these guys are here today. We have Rick King and Kevin Patel with us. Hey guys. Welcome.

Reed (00:51) – Hey, thanks for having us.

Kevin (00:53) – Thanks for having us.

Kim (00:55) – Yeah, we’re glad you’re here. So we are going to be talking about important things that people need to be discussing with a tax advisor as they prepare for their tax return. And there may be some companies that haven’t given a lot of thought around strategy behind filing their taxes. So what would your first step be towards making a tax strategy if you haven’t already done that?

Reed (01:25) – Well, rarely do you find somebody who wakes up in the morning that’s just really excited about paying taxes. It’s usually a significant pain point for people, for individuals, for businesses. As tax advisors, if we can work together with business owners to minimize that big pain point, then why would we not want to do that? It’s just a kind of a no brainer to make sure you’re having great communication with the tax advisor, especially at this time of year.

Kim (01:51) – And it’s not one of those things that if you ignore it, it’ll go away. It’s not going to go away. Right? You’re, you’re going to have to ultimately file the tax return as much as you try to ignore it.

Reed (02:02) – Yeah, you might could get away with it for a year or two, but eventually it will catch up with you and the IRS is not a good creditor to have so you want to avoid that.

Paul (02:15) –  Kevin, why do you think a lot of people don’t focus on that strategy as much?

Kevin (02:21) – I mean, it’s kind of become an afterthought for a lot of people. One, because nobody wants to deal with the IRS or the state taxing authorities. But in my opinion, it’s become an integral part of the business. Whether you’re a CFO or you’re a controller, where it’s in this booming economy, it’s a cash outlay and it’s a substantial cash outlay in most occasions. So I think it needs to be actively looked upon if you haven’t. And a lot of businesses are growing, so it may not have been an issue a couple of years ago, but now it’s going to be going forward.

Kim (02:50) – That’s a good point that in this economy you would hope that your business is profitable and growing and maybe facing challenges that they hadn’t in the past. So this might be the first year that people have really had to face these types of issues and questions, but it’s better to try to get an advanced start. So when is the best time to start creating a tax strategy?

Reed (03:14) – No time better than the present, really. We think about it because it’s a year end, but really this is a conversation that we need to be having throughout the year. Really, we’re like an architect or a custom home builder, just without the good PR.  Every plan, every strategy is going to be different. There’s not going to be two plans, two strategies that look identical. There’s guiding principles, of course. It’ll look similar between the plans, but there’s not going to be two strategies that are totally identical. With every person, with every business, there comes some customization. And that’s just an ongoing process that needs to happen. Talk about tax strategies and tax planning and implementing that. Some strategies take six weeks to implement, some take six months, some takes six years. So might as well get going on it.

Paul (04:06) – Kind of an ongoing conversation.

Reed (04:08) – Absolutely never stop.

Paul (04:10) – And I would assume your better clients are the ones that call you before they get into something during the year, right? And they say “Hey, how will this affect the strategy we’ve created? But then, you know, what is this going to do to me kind of going forward.”

Kevin (04:22) – Exactly. It’s the understanding that we know the client’s business and we know the why behind the decisions they’re making, and that makes us better advisors and it actually, you know, lets us help the business owner and the businesses themselves.

Kim (04:38) – So that’s a good point. What are the kind of fundamental things that an advisor needs to know about the business in order to help formulate what that tax strategy is?

Kevin (04:49) – I think the biggest is how do you make money? Once I know how you make money, what your goals are going forward – because you know the tax strategies as good as what your goals are and how we know to plan for it in the future. It’s not a one-year thing, like Reed had mentioned, it could take multiple years, it could take six, ten years. If you’re expanding internationally, going to other States, that has implications. And just getting your advisor involved on that aspect helps you and helps us become a better advisor to the business and the business owners and the decision makers.

Reed (05:20) – Yeah, I think you want to make sure your tax advisor has a solid grasp of what it is you do. Kevin said, how do you make money? But that plus even more than that, like what it is that you do. It might sound silly that somebody might not know that, but it could very well be the case. There are so many tax advantages that are industry specific. As tax advisors, we like to legally avoid taxes when we can. If that doesn’t work, we like to defer taxes where there’s opportunity. Quick side note on that – deferral of taxes, there’s political ramifications that we have to be thinking about. We always say avoid taxes when you can, defer taxes is step two if avoiding taxes is not – legally by the way, legally avoiding taxes, legally, deferring taxes strategically. And so, you know, that’s always kind of our knee jerk reaction. Is there an opportunity to defer it? Well, the political environment, I don’t think beyond 2020, the tax rates are going to go down any. I think that you’re going to see if anything, taxes are going to go up beyond past 2020. So where our knee jerk reaction might be to a defer taxes, it might be that you want to go ahead and recognize some of that income and pay tax on that income in 2020 instead of kicking the can further down the road. But all of that to say, you know, what kind of industry are you in? Are there opportunities for tax credits? Are there opportunities for test deferrals? And the manufacturing and transportation world for instance, there’s a federal credit for certain types of fuel costs that often gets overlooked. What does your workforce look like? Are you hiring employees right now that might qualify for the work opportunity tax credit? That’s another way to reduce substantially your tax liability. Do you have inventory? Have you considered LIFO? So all of those questions I think help formulate a tax strategy and that just needs to be constant communication with you and your tax advisor.

Intermission (07:30) – Want to receive a monthly newsletter with Wrap topics? Head on over to warrenaverett.com/thewrap and subscribe to our email list to have it delivered right to your inbox.

Kevin (07:45) – So to Reid’s point, every tax strategy is different. Sometimes it’s actually the opposite of what we’re doing with taxes as minimizing current taxes. Maybe it actually helps to have the foresight, like you’d said, that tax rates are going to go up or likely to go up after 2020 maybe, you know, bring that tax payment and the now so you don’t have to pay a little bit later at higher rates. So it’s counter-intuitive, but that’s the type of advice you need and you need to keep your tax advisor in the loop for those very specific reasons because not one size fits all.

Kim (08:18) – So are there some specific things that you know happened during the year that maybe prompt me as a business owner to reach out to my tax advisor? Things that the tax advisor needs to know as part of formulating that strategy?

Kevin (08:35) – I think a couple of quick ones – like if you have major changes in the businesses, like you’re going to a new location, you’re starting a new service line, you’re exponentially hiring more folks than you’ve had over the last couple of years – those are big triggers. You know, if you had a liquidation event or you have a big capex event on the other side, where you’re expecting a large sum for selling something or you’re going to spend something  on a substantial piece of facility or an equipment or whatever, and then you know, you’ll always want to discuss what it is that is specific to your industry. Are you expecting the industry to continue operating like it has in the past or are you expecting a little downturn? So having that analysis from the management team’s eyes gives us an idea of what we need to do from a tax advising standpoint and those are the big trigger points. Are you going to have substantial changes, whether that’s with your people, your talent, your deployment of cash or if you’re expanding what States are going to, and things of that nature.

Paul (09:33) – So you need to be very proactive and precise when you’re, when you’re getting into something, it’s like how is this going to affect me later? And not just jumping into it because it seems like a good idea. I would say taxes is probably the afterthought sometimes.

Reed (09:47) – Yeah, proactive is a, is a big word there. So many times we get into situations where we’re getting information after the fact and then there’s no time to do anything about it. “Oh you did X, ah the window just expired for that. Like I wish you had told me six months ago when we could’ve, we could’ve done something about that.” And a lot of times we think, “Okay, as long as we get everything in, you know, you’re in, we’re fine.” But there’s deadlines all throughout the year that if we can be abreast of any kind of change, big or small, the better we can help plan.

Paul (10:22) – Kevin, you talked a little bit about plans to expand to go internationally. Are there other conversations you need to have from a federal versus state perspective with your advisor? Or do you look at situations differently as it relates to the federal versus the state?

Kevin (10:37) – I think you’d definitely look at it differently, but let’s say if we’re talking right now and current tax law, I think the state planning is become exponentially more important right now because there’s a Wayfair decision where it subjects a lot of the taxpayers to states that they weren’t normally subject to nexus requirements. And that’s changed. And I think having a tax advisor look at doing an extra study and things of that sort and kind of help you mitigate the state tax risks under this new climate is going to go a long way. And that was one of the specific things under the state planning.

Kim (11:11) – Which we’ll do a little reference that we are going to have another episode this season in our podcast specific to state and local taxes because that has been such a significant change in the law and has impacted so many businesses. So that’s a good reference point.

Reed (11:30) – Yeah. And it goes back to just making sure everybody’s on the same page about what it is that you do. What States are you in? Do you have an online platform? Are you soliciting sales all over the world? You know, going back to the States, what States are you required to file a tax return? And, and are there any opportunities in those States? Now I know I’ve got to file a return here, or is there any opportunity to reduce, defer, minimize the tax liability again, legally, strategically. Are there any ways to do that? In Alabama there’s a tax credit available if you have a small growing business. A lot of people aren’t familiar with that. And Georgia, there’s a film tax credit that can help offset some tax. Other States, if you have inventory in other States, there’s inventory tax credits. So just again, making sure that everybody’s on the same page about what States you’re in and then opportunities from there to do to try and come up with a good strategy to minimize those taxes.

Kim (12:35) – So I know that we did an episode and season one specific to tax reform, the new tax law. And I know there were some changes as it relates to business expenses and which ones are deductible. Now there are some that used to be deductible that are no longer deductible, but as a business owner kind of preparing for the next tax return, what do they need to know specifically about business expenses?

Kevin (13:04) – From a business standpoint, what’s different is the meals and entertainment deduction has changed. Before it was just all lumped together and a taxpayer could take 50% of that as a deduction and the other 50% was non-deductible. Now meals are separate. Entertainment are separate. From a record keeping standpoint, with our business owners and our tax payers, they need to be cognizant of that, that they can’t be lumped. So there’s a little bit change in how they keep records and where entertainment is not deductible anymore. If you’re taking a prospect or a client or a vendor to an Alabama football game, well that part is not deductible anymore. Meals still are deductible 50% and you know, employee meals that you are providing at the convenience, uh, for the benefit of the business, those are still 100% deductible. Another one that gets missed is folks that provide parking to their employees, that’s not deductible anymore. So that needs to be tracked and needs to be provided and getting ready to prepare your tax returns for the upcoming year.

Reed (14:06) – Yeah, the meals and entertainment is probably the one item of tax reform that I’ve gotten the most questions on. Like Kevin said, the old rule was you lump everything together, you take 50% of it and you move on with your life. Now there’s a lot more of this required. I think, give a little plug here for a top golf. Top golf is, there’s a golf element of that and there’s a food element of that. As a place that we’ve gone as a company and lots of companies go to treat their employees, whatever. When you go there, you have to make sure you get two receipts, get the meals on one, get the entertainment on the other because one of them is going to be deductible and one of them is not. We have a lot of business owners that have airplanes. Airplanes are, can be an entertainment facility. So the travel costs associated with a trip to say the masters or to a football game can be nondeductible in addition to the destination, as Kevin said, like a football game. Now you know, that’s nondeductible. Entertainment or the trip there can also be non-deductible as well under these new laws.

Paul (15:17) – So there’s a lot more criteria you have to think about as you’re trying to plan how we’re going to spend our money from an expense perspective and where is that going to go?

Reed (15:27) – Yeah. And it goes back to again, constant communication throughout the year is going to prevent a surprise. Well you thought that that entertainment was deductible like it was last year. Sorry. It’s not any more, unfortunately, I wish it was, but it’s not. And so constant communication can help prevent that from being an issue.

Kevin (15:47) – Besides some regulations,  lot of this hasn’t been tested by the IRS. So if you as a business owner and a management team have questions, just reach out to your tax advisor and see if they can find the answer themselves or in the community to see what other folks are doing. That’s a great resource so you don’t have to just kind of figure it out all on your own. Because some of them, like Reed was saying, the travel to an entertainment spot, whether that’s deductible or not, is it strictly entertainment or is it not. So maybe just reaching out, being in constant communication and if you have a question, just ask.

Reed (16:21) – And there are no stupid questions either. This is the biggest change since 1986 to the tax code. And so never hesitate to reach out because this is a lot of stuff that’s new and a lot of stuff is different.

Paul (16:33) – Y’all talked a little bit about documentation. When y’all are dealing with business owners and executives, what’s the biggest pitfall you see from a documentation perspective that? You know, it’s like, “Hey, as you’re preparing, make sure you’re shoring up X, Y and Z.” What are some of those bigger ones that you see often?

Reed (16:52) – Basic financials can, can really go a long way. We have questions about do I need to bring in – you see it all on the individual side a little bit more, but it can apply to businesses too – do I need need to bring in all my receipts for everything. No, you don’t need to do that. A lot of planning and a lot of advising can come just from some basic set of financials. It doesn’t have to be overly detailed to at least get a good start on formulating attached strategy.

Paul (17:23) – I don’t need my shoe box?

Reed (17:26) – Well you can always try it. But another question that comes up is how long should you keep the shoe box? And I got that question last week, actually. And a tax return can be audited basically three years back. And so we recommend that three years worth of information be retained. As far as how long to retain a tax return, there’s really no great rule of thumb on that. My recommendation is to keep it indefinitely. But as far as the records that go into that, three years is a good rule of thumb on that.

Kevin (18:07) – I think the other thing I wanted to point out is for our small growing businesses where the owners are heavily involved, they don’t have the full accounting department yet. Keeping the personal separate from the business, having confidence in the financials we are getting. And if I see a $10,000 conference expense to Hawaii, you know, then it makes me question what else is in the general ledger. It’s simple, but it happens more often than not. You’re getting cash from one place and you’re doing different ventures or you’re going to go buy a boat or something so you’re just moving cash around if you are doing that, have the trace and go through it. Keeping your business from your personal separate I think is a big key as well. That’s the one that comes up more often than everybody thinks. But I think it comes up, especially with credit cards now with having large limits, people use their personal credit cards to buy something for their business and then there’s no transfer of electronic records back and forth between the business and the individuals. So that’s kind of another point I want to highlight.

Paul (19:08) – So here on the wrap, we like to wrap up in 60 seconds, you know, a couple of sentences, paragraph, whatever it is, you know, what is the one thing you want our listeners to take away from this? AS they’re preparing for creating that tax strategy or preparing for that tax return.

Kevin (19:23) – For me, just continue to communicate and if you’ve got an issue, go out and bring it up with your tax advisor. Because you know, collectively if we brainstorm, generally speaking, you’re going to come to a better solution for the business and from a tax standpoint. So just constant communication.

Reed (19:39) – I’d say something similar. Make sure you have a good relationship with your tax advisor. Pardon the cheesy accounting pun here. But a good tax advisor should be an asset on the balance sheet. Good, good return. Creating value for you, not just in expense on the income statement. I think that’s been a theme of some of the answers that we’ve given is, is made sure you’re in constant communication and have a good relationship.

Kim (20:06) – I see Reed went to the same comedy school that you did, Paul.

Paul (20:09) – Thanks. I appreciate that, Kim.

Kim (20:11) – Yeah. Hey, Reed and Kevin, thanks for being with us today, guys.

Reed (20:13) – Absolutely. Thank you.

Kevin (20:15) – Thank you.

Close (20:17) – And that’s a wrap. If you’re enjoying the podcast, please leave a review on your streaming platform. To check out more episodes, subscribe to our podcast series, or make a suggestion for other topics to cover. Visit us at warrenaverett.com/thewrap.

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