Podcast: Play in new window | Download
CPA and tax strategist Mike Jesowshek joins the podcast to teach us how to be proactive in your tax planning and maximize marketing deductions for attorneys and law firms.
This podcast covers what “tax planning” is, what and when to deduct, and some things law firms may start deducting now.
Mike Jesowshek may be contacted here:
- Podcast Website: https://www.taxsavingspodcast.com/
- Tax Minimization Program: https://www.taxsavingspodcast.com/tax
- Apple iTunes Direct Link: https://podcasts.apple.com/us/podcast/small-business-tax-savings-podcast/id1377376636
- Firm Website: https://www.incsight.net/
See all episodes or subscribe to the Personal Injury Marketing Minute here: https://optimizemyfirm.com/podcasts/.
- What is tax planning?
- What types of expenses are tax-deductible?
- Are there limits to tax deductions?
- What are some things that law firms can do now to help maximize their marketing tax deductions?
Welcome to the Personal Injury Marketing Minute, where we quickly cover the hot topics in the legal marketing world. I’m your host, Lindsey Busfield. We have discussed different ways to maximize your ROI on marketing initiatives. Today, we are going to take this a step further and discuss how to incorporate strategic tax planning into your marketing process to save you lots of money, to reinvest back into your business. CPA and tax strategist, Mike Jesowshek is joining us today to teach us how to be proactive in your tax planning and maximize your marketing deductions. Thank you for joining us.
Yeah, thanks for having me, Lindsey.
What is Tax Planning?
Well, many of us who aren’t tax gurus simply approach our taxes with the attitude of, I need to pay X amount every quarter or every year so the IRS doesn’t come after me. However, this strategy, I guess, leaves lots of money on the table that could have otherwise been invested in growing your business. So Mike, let’s start with some tax planning 101. What is tax planning?
The thing is when most people hear the word tax, you’re exactly right, they think preparing and filing tax returns, I see my accountant in March and then I come back again next year and do the same thing again, and that’s just really just tax prep. That’s compliance, that’s required by law and important, but it’s really just taking information, what happened throughout the year? And sending it up to the IRS, sending it up to the state agencies. And so when we talk to small business owners, we want to say, okay, let’s change the focus of that. When you hear the word tax, we want you to think of tax planning. And so to your question, what is tax planning? And tax planning is simply just the act of researching, learning and implementing strategies throughout the year that are going to lower their tax liability.
And so when we look at tax planning, it’s just this idea of what can we do to make sure that we’re paying the least amount in taxes as legally possible? And so that is tax planning is not necessarily filing estimated taxes or filing tax returns, tax planning is everything you do before that, because once 12/31 hits, once the year is over, most of the tax strategies that you can implement to lower your tax liability are out the door. And so our focus is what can we do throughout the year to implement and make sure that when we go to file that tax return in March, one, we already know exactly how much we’re going to be paying or not paying at all, depending on the different strategies that we implemented in.
And so I always want to try and change that focus when we talk about tax planning, and when we hear the word tax, I want people to hear the word tax planning. What can I be doing? What can I be implementing within my business to lower that tax liability today so that when I do that tax prep and what I typically think of tax, I already know that I’m paying the least amount that I legally could or the least amount that I was able to that year.
How can lawyers reduce that tax liability?
Right. So it really is much more involved with the strategy behind it as opposed to just, as you said, the compliance of it. And so what are some of the main ways that people can reduce that tax liability? And especially thinking about it from a marketing perspective and really different facets of business in general, how can they approach different operations with that reduced tax liability in mind?
So one strategy that we always start with, and it might seem simple but I don’t think a lot of people really understand what it means, and it’s just this idea of maximizing deductions. And when most people hear maximizing deductions, they think, I need to go out and buy a computer that I don’t need or I need to buy a new truck that I don’t need, or just buying things that they really don’t need but would be cool to have just to get a tax reduction. That’s not what we want to be doing. We don’t want to be spending money on things that we don’t do because money out the door is worse than paying taxes. If we buy something for a thousand dollars that we don’t need, sure, we save 20 or 200, $300 in taxes, but now, we lost a thousand dollars.
And so we want to change that focus, and we look at this idea, when we talk about maximizing deductions, we’re saying let’s think and try to find some of that spending that we’re already doing and see if we can change a way to make it a business deduction. And so a lot of times, we look at after tax versus pre-tax dollars, and so the best way to describe this is imagine that you’re a W2 employee working for somebody else. You have your gross wages and you have all these taxes taken out, and then whatever’s left over is what you’re spending on and so that’s considered after tax, your money’s already been taxed. So if you go out and buy a computer, you go out and pay for your kids’ basketball camps and do all those things, you use after tax dollars to do all those items.
But as a business owner, we have this great advantage of where we have our sales or our revenue and we have all these expenses that go into it, and whatever’s left over is what we pay taxes on. So if we can move spending that we’re already doing in after tax dollars, move it into a pre-tax dollar, we’re taking spending that we’re going to do that spending anyways but now we’re getting a tax reduction for it. And so when we think of this idea of maximizing deductions, we won’t be thinking, okay, what can we move from after tax dollars to pre-tax dollars? And this entails things like hiring your kids. If we’re going to be paying for basketball camps and sending kids off with their friends to amusement parks and things like that, that’s money we’re going to be spending anyways.
Well, how could we hire our kid in our business, get a business deduction, our kids potentially pay no income taxes on it, and then they can go out and pay for that basketball camp or that amusement or whatever we might want to do there? And so a lot of times, we’re talking to attorneys, attorneys come to us and say, “Well, I’m an attorney. What can my eight year old really do in my business? He’s not going to practice law for me.” And we say, “Well, let’s dig a little bit deeper into that. Can they shred papers? Are you doing paper mailings? Can they stuff envelopes? What could we find around the office that they could be doing?” As the kids get a little bit older, we talk about can they run your social media or put posts on your social media? And a lot of attorneys say, “Well, I don’t need to advertise sometimes or anything like that.”
And we’re like, “Well, what if we just did some advertising? What if we just did some social media posts to help you boost that in? What can we find for your kids?” And I say, “Get creative, think of ways to do that, to hire your kids.” Again, moving money from after tax dollars to pre-tax dollars. And we talk about this a lot with meals. You’re going out with friends or family. Are they potential clients? Are they employees? Do they do work for you? Are they maybe advisors of yours? And so we will oftentimes say, let’s try to take this word of friends out of our vocabulary and see if there’s ways that we can tie it to our business.
Now, obviously, we don’t want to be doing this for everything, and if every time you go out to dinner with your spouse, they’re charging it to the business, your spouse probably is not going to really enjoy that because you’re always talking business, but we can start to mix some of these things in and say, this is actually a business expense. I didn’t think of it that way initially or I didn’t know it that way, but as long as I’m recording it and saying, who did we meet with? What were we discussing? We can shift that into a business expense.
And another thing that we talk about a lot with the law firms is a lot of law firms will support the community that they’re in and do charity work and things like that, and traditionally, if you’re supporting a charity through your business, it’s a charitable deduction. But the problem with it is that charitable deductions get treated differently when they come to your personal returns, so even if you’re giving to charity through your business, it’s going to be treated as a charity when it flows through to you personally, depending on how your business is organized or taxed. And so a lot of times, we say, let’s flip the switch on that. How can we find a way to tie advertising to charity? So how can we say for every client that we have, we’re going to submit $10 to this local food pantry or whatever it might be? We’re utilizing that as an advertising. People might come work with us because of the charitable giving that we’re doing, so it’s saying, okay, it’s taking the same deduction, but now we’re going to take it as an advertising expense.
Or what somebody locally did at a farmer’s market is at the beginning of every farmer’s market every year here in Wisconsin, there’s an attorney that gives away life vests for boats. And so they buy all these life vests, they go out on the farmer’s market and they give them away to all the kids that are coming. Well, that is kind of like a charity, but really, it’s advertising. They’re getting their name out there, they give away some water bottles and stuff like that and that’s all being wrapped into advertising, even though it might be thought of as maybe giving to charity. So when we look at things, it might seems simple from the front. Maximizing deductions might seem very simple when we talk about it at a basis, and it is simple, we just need to really dig deep into it and say, “I run everything I should through my business.” Well, let’s look through your personal credit cards, let’s look through your personal spending and say, is there maybe some things that were business related that we can shift over and move into that area?
Travel’s another big one. The first time we always talk to a client is we say are you planning any travel this year? They say, “Well, yeah. We’re going to Disney with my family and we’re going to go visit some family down in Texas.” And I say, “Well, do you have clients down there? Is there a conference maybe that you can attend? Things like that?” Again, you’re going to do that trip no matter what, but how can we maybe get a portion of it as a business expense? How can we wrap some of those other things into it as a business expense? So it’s a culmination of there’s a lot of different areas when we talk about maximizing deductions, a lot of different types of expenses, but again, it’s just that idea of changing that mindset, of being, “Hey, I’m a business owner. I get this great gift from the government where any expenses that I have offset my income and I pay taxes on whatever’s left over,” and that’s this idea of maximizing deductions.
Yeah. So it all comes down to having a mental shift about what you’re already doing and leveraging that to help reduce your tax liability and maximize your deductions. And it’s so funny, as you are talking about these different things, it’s clicking different memories in my mind. I grew up in a highly entrepreneurial family and when you were talking about hiring your kids, I think that this is a great idea because there are a lot of things that kids can do, young adults can do. And just as an amusing side story, my parents owned an aviation supply store when I was probably about 10 years old and they would bring me into the store and they would have me put the labels on the merchandise and they would have me work at the counter and check people out as they were coming out, and I was 10 years old and I thought it was just something cute that they were doing. So now, I’m going to have to go back and have a conversation with them to see if I was a tax deduction, and it would be smart for them to do that.
Yeah, absolutely. And there’s different ways you can do that too. So a lot of parents will be like, and obviously with that money that you’re giving them, you can’t have them buy groceries for your family or pay you back rent, but those extracurricular things, that’s totally acceptable. And a lot of clients say, “Well, I’m just going to pay for that. I don’t want my kids to have to pay for their own entertainment or things like that.” And I say, “Well, great. This is a nest egg for them.” Or maybe since now they have earned income, maybe we’re submitting it to a Roth IRA. And we did a study with a financial advisor that if you put, I think it was $6,000 into a Roth IRA, which you could pay your children $6,000 out of your business, put into a Roth IRA, if you did that at the age of eight, if you did it one year based on whatever the metrics were on interest rates and things like that, it would be worth a million dollars at the time of retirement.
That’s just one year, one contribution, and that’s where you can start to get creative with some of that thinking that you’re doing within a strategy, a strategy within a strategy there.
That’s huge, and again, that all comes down to being strategic in how you’re doing this and not being reactionary and waiting until the last minute, so that’s fantastic. So are there any limits to the tax deductions that you can take?
Yeah, that really depends on… When we talk about tax strategies, we talk about core tax strategies, and these are tax strategies that are available, whether you’re making $5,000 a year or a million dollars a year. These are things like hiring your kids, setting up a retirement plan, maximizing deductions. Regardless of your business size, these are strategies that you can implement within your business. And then we have what we call advanced tax strategies and these are typically going to be for higher net worth, a little bit more complex. You might need some initial upfront investment into them, but what we always say is let’s focus on our core strategies. What can we implement? How can we maximize everything in our core strategies? And if we still have a tax liability after that, then let’s look at advanced tax planning.
So when we look at core strategies, different limits and when does this make sense and when does it not? It really just depends on what strategy we looking at. If we’re looking at a retirement plan for example, if we’re going to fund a retirement plan for us as owners, we might be looking at based on the limit based on your income, how much you can contribute, but a lot of the strategies are things that we can implement right away and anybody can implement. If we look at something like an S corporation, which is just an election and a way to be taxed, we might say, “Okay, let’s wait till we hit, say $50,000 or so in profit, and then let’s look at an S corporation.” So most of these strategies, when we talk about core strategies and things like that, most of them can be implemented at any level, but sometimes, you have a limit of how much can you put in there?
And I always say don’t get greedy with these types of things. Take advantage of what’s available to you. The tax law was written the way it was for a reason. Take advantage of what that gift that the government has given us as business owners to take advantage of that, but also don’t take it overboard. Every time you go out to dinner with your spouse, don’t take that as a business expense because that’s probably not realistic that every single dinner you have, you’re talking business. Now, I would say as a business owner, that probably is realistic, but we still have to play within that realm a little bit. If 90% of the conversation was personal and we threw a little bit of business in there, maybe that’s one that we put on the personal side, but the next one that’s 90% business, let’s make sure we’re taking advantage of what’s available but not getting too greedy.
I always encourage clients, get aggressive in this area. Again, as long as we have documentation support to back it up, and that’s as simple as you go out to dinner, you purchase something, just write on the receipt, directly on the receipt, what was this for? Who did you meet? What’s the business purpose or business reasoning behind it? Take a picture of that receipt, file it away and you never have to worry about it again. Now, the odds of the IRS asking for that receipt, pretty low, but if they do, you already have that receipt filled out and you don’t have to remember three years down the road, who did I eat dinner with at this restaurant and why was it business related? Just write it on the receipt, take a picture, file it away and you’ll probably never need it but if you do, you can feel comfortable knowing that you have all that proof and documentation that you need to back it up.
Software to help you organize:
Right. Because the idea of a tax audit from the IRS is one that just gives me the heebie-jeebies and makes my skin crawl, but again, if you have proper documentation and as you said, take a picture of the receipt, make a note, and that way, you aren’t having to scramble in your mind for, okay, well, who was I meeting in Sarasota and XYZ restaurant? But are there any programs out there that can help you organize these receipts and help you keep tabs, so to speak, on the expenses that you are incurring and writing off?
Yeah, there’s a lot out there. So we use a software called Xero for most of our accounting type work and there’s a software called Hubdoc that Xero owns that has that whole receipt to document management. There’s Receipt Bank, there’s a lot of different softwares out there that help make that possible. What I did at the beginning was I just set up a Dropbox or a Google Drive folder, organized it either by month and year or organized it by vendor maybe, and just dropped those receipts into those folders. I think that the biggest thing is you want it to be somewhat organized so if you do have to grab, it’s not going to take you a bunch of time to collect things.
So make sure you just have some type of organization with it, whether that’s if you group it by vendor, maybe in the description, put the year and the month of that receipt. If you break it down by year and month, great, just file it in there. Maybe in the description of the file name, you put the vendor name or something like that. But whether you’re using a software or whether you’re just using Google Drive, there’s a lot of easy ways to do that. I would just say try to get something digital. The last thing you want is just boxes of receipts all over the place, and if the IRS comes knocking, more likely than not, it’s going to be a lot easier for you to just print out those pictures you took and just send them over than have to sift through a bunch of paper receipts. But yeah-
I’m sure your CPA will appreciate that at the end of the year as well.
Exactly, and that’s coming from a CPA so that might be some some ulterior motives there, but exactly what I would say is so many people are afraid of the IRS audit. Don’t be afraid of that, as long as you have your documentation. And that’s where that documentation really helps me, helps our clients sleep at night because they’re like, we don’t care. If the IRS comes knocking, we might be being aggressive but we can support it, we can back it up and so we don’t care if the IRS comes knocking because we have that proof to back it up.
Small Business Tax Savings podcast:
Right? Absolutely. Well, if listeners want to learn more about strategic tax planning in general, where can they reach out to you?
So we have a Small Business Tax Savings podcast. We do weekly episodes, you can find us on any podcasting platform. We also do a blog post along with every episode so if you prefer to read versus listen, you can find those at taxsavingspodcast.com. And then we also have a tax minimization program where we take that step up, go a little bit deeper with those items, which you can find again on our website at taxsavingspodcast.com.
Great, and we’ll include links to all of those on our page right here.
Yeah. Lindsey, thanks for having me on.