#33: Five Advanced Tax Strategies That Could Give You $100k+ To Invest Back Into Your Business Without Touching Your Profits
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Tiffany Phillips is a CPA in the greater Houston metroplex, but she is not your average CPA. On average, Tiffany saves her clients over $97,000 in their first year alone in tax savings. Tiffany is going to share five advanced tax strategies that could give you $100,000 plus to invest back into your business without touching your profits.

Learn More Earn More Business Growth Podcast

Host: Brian Webb

Guest: Tiffany Phillips

Episode 33: Five Advanced Tax Strategies That Could Give You $100k+ To Invest Back Into Your Business Without Touching Your Profits

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TRANSCRIPT 

Brian Webb:

Hey, everyone. Welcome to the show today. It's fun week after week to bring you content that helps you to make more money, save more money, grow your business smarter, grow your business faster. Today's going to be no exception. My guest today is Tiffany Phillips. Tiffany is a CPA that serves here in the greater Houston metroplex, but she is not your average CPA, certainly not in my experience. On average, Tiffany saves her clients, on average, over $97,000 in their first year alone in tax savings. And she's my guest, your guest today on the podcast to share five advanced tax strategies that most people don't know and in my personal experience, most CPAs do not bring to their clients. So, imagine if you could save nearly $100,000 and you could have that capital to reinvest back into your business, into growth without dipping into your own profit.

Wouldn't that be amazing? So, let's jump into my interview today with Tiffany Phillips. She's going to save you a lot of money this year and in the years to come. I'm excited to have you on the podcast today. I know that you are going to share five advanced tax strategies that can really save people a lot of money. And I had shared even in the introduction today that imagine if the typical business owner, the typical small business owner was handed a check for a $100,000 or $150,000, or for that matter 20, 30, 50, $70,000 that they could reinvest back into their business for growth without dipping into their profits, that would be an amazing thing, right?

Tiffany Phillips:

Yeah. It's pretty amazing not having to send that money off to the IRS and having more control over what you're able to do with that for sure.

Brian Webb:

Yeah. And to do that ethically and legally, of course.

Tiffany Phillips:

Of course.

Brian Webb:

Yeah, absolutely. And so, you're going to share five advanced tax strategies today. The first one I'm excited for you to talk about because most people don't know this. Well, actually I think all five of these most people don't know. But let's start by talking about hiring the children, El Ninos. Talk about that tax savings strategy, I'm curious.

Tiffany Phillips:

Yeah. Oftentimes as business owners, we're looking for ways to kind of shift money, get them out of our higher tax brackets into either lower tax brackets or just eliminate the tax altogether. When it comes to paying the kids it's pretty cool because you're able to actually pay them for work that they may already be doing, or maybe they're not. Maybe you have a social media campaign that you need help and your 16-year old just happens to be killer at IG-

Brian Webb:

Okay.

Tiffany Phillips:

... Instagram or YouTube videos, just something, right? Or maybe you need your dentist and you're looking for some new photography for your website or your pamphlets and your kids are your models. And so, there's all sorts of ways that that back can happen, and what ends up happening from a technical or tax perspective is those kids have to be paid in a separate entity to avoid paying payroll taxes.

That's really payroll taxes. And then a lower tax bracket are really the ways that you're getting reduced tax expense. Through a family management LLC, you're actually able to pay a management fee from your regular business, your escort, your partnership, whatever that looks like over to this family management LLC. And when you pay that management fee over, you're able to pay W-2 wages to your children. Now, if you pay them less than the standard deduction, which has 12,550 for 2021, if you pay them that amount or less, they don't have any income tax on those wages.

Brian Webb:

Right.

Tiffany Phillips:

So, essentially what you have saved is 15.3% in payroll taxes, and then whatever your tax bracket is. So, if you're at the highest tax bracket, 37%. So, 37% plus 15.3%, that's huge savings-

Brian Webb:

It is.

Tiffany Phillips:

... on that $12,500. You can take it a step further in also they can take an IRA contribution and go ahead and start saving for their own retirement in the future and you would get that tax-free as well, which is another $6,000 back. The thing that you have to be really careful of when you're using really any of these strategies, but I'm going to say, especially this one is it really needs to be for work that they are performing. Don't just cut your kid's check and then not doing anything. Then it needs to be something that is documented. So, you do you want to, it doesn't have to be perfect, but some notes on what they did, the hours that they worked, whatever, and then make sure that it is fair wages. So, you can't pay your 12-year-old, $100 an hour if you wouldn't pay someone else $100 an hour for that same work.

But if you can do all of those things, then you could save those taxes on $18,500 of your income every year, and then use that money, put it in a separate bank account that is in their name. You would be custodian of it, but it's in their name, and use that for other funds. Then it turns things like private school tuition into tax-free dollars. It turns things like their tournament, baseball team that they're on, the other uniforms, and all the expenses that go into that, those are now tax-free dollars. Their dance lessons are now tax-free dollars. So, it really creates significant savings and can make a huge difference.

Brian Webb:

I have two grown sons and a beautiful, beautiful daughter who's getting married in November. And when I think of the amount of money that I could have saved over those years, my only question is where have you been all my life, Miss Lisa?

Tiffany Phillips:

Right? Yeah. Well, and one thing to mention too that I didn't is the age like the age category to be able to save the payroll taxes. And for this strategy, starts at age seven. So, anything below age seven, they're not going to view that is wages that they earned. I mean, I don't know very many four-year-olds that could really do quality work. And then at age 18. So yeah, for those 11 years, it's huge. And then even beyond that, as long as it's below that standard deduction threshold, that's huge savings.

Brian Webb:

Awesome. So, let's go to advanced tax strategy number two, home administrative office, talk to us about that.

Tiffany Phillips:

Yeah. So, this one is a little bit more straightforward, but I meet very few people who know they can do this. So, essentially what it is, is if you have a business location outside of your home, maybe you have a retail storefront or a restaurant, or just another office that your employees meet at a manufacturing facility, whatever that looks like, if you have another location but you also have a home office, if you establish the business address with like the IRS as your home versus that other location outside of your home, what they do is they call that a home administrative office. And then your community miles between your two offices are now deductible. So, before you couldn't draw it off that mileage while driving from your home to, let's just say your restaurant that you own, but now if your home is your administrative office, all of a sudden that mileage is totally deductible because you're driving between two offices and that's it, it's simple. Especially in Houston, like we are, that could be considerable mileage that rack set and every little bit helps.

Brian Webb:

Oh, absolutely. Okay. So, and that by the way is different than for someone who offices in their home, the solar-preneur, for example, and claiming the space of their office. This is an addition to that, right?

Tiffany Phillips:

Yes. This is an addition to that. So, this is not the home office, as far as taking a percentage of your utilities, your internet, things like that, which that 100% is a viable deduction as well. This is on top of that.

Brian Webb:

Okay. So, advanced tax strategy number three, late S election. Talk to us about that.

Tiffany Phillips:

Yeah. So, when it comes to the way that let's say LLCs are, we'll use LLCs as an example, the way that they are taxed, you have a couple of options. You can be taxed as a partnership. You can be taxed as an S-corp or it can be taxed on your personal return, what they call a single-member LLC on your Schedule C of your personal tax return. Now, the issue with the partnership and being taxed on your personal tax return is that you have a considerable amount of self-employment tax that gets paid on that. So, 15.3% of the profits. With an S-corp, one of the reasons why most people like S-corps is they're typically not every time, but typically there is a considerable amount of tax savings by using S-corps because you get a reduction of self-employment taxes that are paid.

Brian Webb:

Right.

Tiffany Phillips:

Now, sometimes people, life happens and people get behind on doing tax returns. It just doesn't get done the way that it should and by the deadline. And so, I'll have people come in, our new clients will come in and they haven't filed a tax return in a couple of years. And maybe to have an LLC that's been really profitable. Maybe that LLC has been making, let's just say a $100,000 of profit in those each of those two years.

Brian Webb:

Right.

Tiffany Phillips:

Well, the way that they currently just as a regular LLC are structured, they're going to end up paying 15.3% tax on top of their federal tax or income tax. And so, that's 15,300 for both of those years in self-employment tax. If we go back and there's a particular way you do it, there's a form that you have to fill out and you have to cite some particular IRS revenue procedures, and basically beg for forgiveness and say, "Hey, we're sorry.

We believe that we fall in line and should have gotten an S election in this time. The only reason we didn't do it is because we didn't do the paperwork." That's kind of what the IRS says, "Well, if you meet all these requirements and the only thing that you didn't do was paperwork and you've checked off all these other boxes, then we'll forgive you. We'll pardon your sin and you'll save that $15,500 for each year." So, you end up saving over 30 grand, just literally by filling out some forms, getting it to the IRS, and then accepting it.

And so, it can really be a big deal, especially for someone who is a little behind. Typically for someone who is behind, they are faced with a bigger tax bill, which typically is part of the reason why they have another taxes. They don't want the bill. And so, to be able to find nuances in their life late S election can be huge for reducing that for them. And basically what the IRS says is that as long as it's within three years, a little over three years, actually from when the S election was due, then they'll accept it.

Brian Webb:

Let's talk about captive insurance. Talk about how that can be used to also mitigate tax liability.

Tiffany Phillips:

So I would say of our strategies today, this is probably the most advanced. Captive insurance is exactly what it sounds, it's insurance. The difference with captive insurance is you have more control over it. So, rather than going to a third party and getting like a general liability policy or some other policy through an insurance provider, you're actually working with this captive insurance company to figure out what insurance you need. And then you are utilizing another entity to get tax savings. So, what does that look like?

Brian Webb:

Yeah.

Tiffany Phillips:

Let's just, I need brand protection, or I need, maybe I don't want to have a third-party health insurance provider. I want to be self-insured and have health insurance for my employees, that is a self-insurance policy.

Brian Webb:

Okay.

Tiffany Phillips:

Or you can go in, I mean, really any number of ways. One of the big ones is the business interaction that was faced last year and really over much of the past year and a half related to COVID, a lot of policies, in fact, I would dare say very few, if any policies paid for the interruption because of some verbiage that they have in those policies that had, you had a captive insurance policy that was tied back to business interruption, you were golden and they would payout for that.

Brian Webb:

Wow.

Tiffany Phillips:

Hurricanes, it's another one. We had a hurricane here in Houston a few years ago that was pretty bad. And the other one for business interruption, where if you went to your insurance company and said, "Hey, my business has been interrupted. I should get paid on my policy." They said, no, unless you were directly impacted. If you had water in your business and you were shut down because of that water, then they might pay but otherwise, if you were just, you were dry, but you couldn't get anywhere because you were landlocked or whatever your business was shut down, they didn't care.

And so, there's a lot of different applications for this. And basically what happens is your main business, whatever that is Joe Smith LLC, that business would pay that entrance fee over to a C-Corp. And in that C corporation and a third party is one that helps manage it. It's set up for insurance. So, it is a special type of entity. You can't just start a C-corp and do this. It's very specific in a way that it has to be done. And then they manage those funds. And then if you have a claim, then they handle it and whatnot. And the biggest thing I would say is you have to have a couple of intentions behind it. You have to have the desire for insurance. So, it really has to be that you want an insurance policy for this, and you have to want to reduce your taxes.

So, if you're only going in this to reduce your taxes and you don't care about insurance, not the plan for you. Vice versa, if you're only looking for the insurance and not really looking for a tax reduction, not for you because the IRS is pretty particular on this one on how it must be done to meet their qualifications and meet the rules. And eventually what happens is for any of the money that is not paid out, you're able to pull the money from that entity [inaudible 00:14:24] pay that point you pay capital gains tax instead of your normal income tax rates. So, again if you are in the top tax bracket, 37%, and pull out the funds from the C-corp at capital gains rates, 20%, you end up saving 17% on the money.

Brian Webb:

Wow. So, we've talked about captive insurance, late S election, home administrative office, hiring our kiddos, right? One more for the sake of time, talk about employee retention credit and how we can save money on taxes with that.

Tiffany Phillips:

Yeah. So, the employee retention credit is a little piece of goals that they put into the CARES Act, which was one of the bills passed related to COVID. I believe it was one of the first two that they did. And they basically said, "Hey, if you are a company that's had economic hardship due to COVID, whether it's a full or partial shutdown or reduction and revenue, then we will give you a refundable tax credit."

Brian Webb:

Okay.

Tiffany Phillips:

So, you have to be a business that has a 100 employees or less. So, that's one of the rules and you can't double-dip. So, if you got PPP funds, you can't use the same because it's tied to qualified wages. You can't use the same wages that were used for PPP. Now, you can use the employee retention credit. If you've got PPP, you just have to be really careful about making sure that you're divvying it up properly.

But essentially what happens is for they're looking to see what kind of a reduction in wages that you have. So, for 2020, if your wages for any quarter or 50% or more, less than 2019, then you qualify. For 2021, if that reduction of revenue was 20% less than the same quarter for 2019, so it's more favorable in 2021, you qualify. For example, I'll just do a really quick example here. If you have $10,000 of qualified wages for an employee, that's the max per employee per quarter. And they basically go, they take half of that. So, it's 50% of the qualified wages which gives you 5,000. It's basically that amount times the tax rate of 6.2%, which is the social security part of payroll taxes and you would end up saving that money. That would be a refund to you.

You have to send in the right form, you would amend basically your payroll tax forms to get that money back, and then once the IRS processes, then you get a refund. I've seen some clients get a few $1,000. I've seen other clients get $30,000 refunded to them. So, it can be a sizeable refund. They're getting ready to end this particular credit. But if you haven't taken advantage of it, you can go back and amend previous payroll tax quarters to get that money for you. So, that timeframe doesn't lap anytime soon, but they're about to close the window of the available quarters that can be used.

Brian Webb:

Wow. So, while you've shared five really good advanced tax strategies today, we had to limit the time obviously, because this is a podcast. It's not like a docuseries of course, but I would imagine you have dozens of others that you help your clients with too, right?

Tiffany Phillips:

Absolutely. I mean, really what we do is when a client comes in, we do what we call a strategy session and go through and get a feel for that client, their business, the details of their life. What do they have going on? I mean, there's a lot of stuff that goes into everyone's specific situation. And then we determined, can we help you? If I'm honest, very few people can't be helped with tax planning. I mean, if you own a business and you're making money and you're paying tax, then there are savings to be had. And so, we go through and we look and look at a myriad of different savings strategies and then create a tax plan that's specific for them. But there's dozens, hundreds, I mean, there really are quite a few different strategies that can be helped, and then we just put that plan together and chip away those taxes.

Brian Webb:

One of my mentors, Jim Rowan once said, "What we do not know will hurt us." And when I think about some of what you've shared today, even just in the context of a single year, the huge amount of value and savings that you could bring to your clients. But when you think about the people who have gone years and decades, imagine what that number would add up to over 20 years if someone went 20 years without knowing what you've, a piece of what you've shared today, let alone everything else that you share with your clients. So, for those in our audience who want to know more about you, engage with you, find you online, what's the best place for them to do that?

Tiffany Phillips:

Yeah, the best place to go is our website. So, www.tiffanyphillipscpa.com. You can actually click on the very main page there. There's a button and you can schedule on our calendar right away to get the availability and then we can actually go through that strategy session with you and see if it's a fit to work with you. And to your point, yeah, it's shocking and sickening oftentimes when people come in and realize how much they've overpaid over the years.

Brian Webb:

Tiffany, when I think of all that you've shared today, I can't even imagine how many people are going to benefit from this and potentially the thousands or tens of thousands or hundreds of thousands, or maybe even millions of dollars that you could be saving the audience in the years to come. So, thanks for being a great guest today. It was great to have you on the show today.

Tiffany Phillips:

Yeah. Thanks for having me.

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