Healthy, Wealthy, & Smart Episode 352: Tax Mistakes That Can Cost You Money
Karen Litzy sits down with Craig Cody, CPA to go over some tax tips. Mr. Cody lets listeners know some strategies medical providers can use to lower their tax bill. He also discusses how proactive tax planning can help private practices.
More Information on Craig Cody:
Craig Cody is a Certified Tax Coach, Certified Public Accountant, Business Owner and Former New York City Police Officer with 17 years of experience in the Force. In addition to being a Certified Public Accountant for the past 15 years, he is also a Certified Tax Coach. As a Certified Tax Coach, Craig belongs to a select group of tax practitioners throughout the country who undergo extensive training and continued education on various tax planning techniques and strategies to become, as well as remain, certified. With this organization, Craig has co-authored an Amazon bestseller book, Secrets of a Tax-Free Life.
Welcome to the Healthy, Wealthy, and Smart podcast. Each week we interview the best and brightest in physical therapy, wellness, and entrepreneurship. We give you cutting edge information. You need to live your best life. Healthy, wealthy, and smart. The information in this podcast is for entertainment purposes only and should not be used as personalized medical advice. And now, here's your host, Dr. Karen Litzy.
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Okay, onto today's episode. This is for all of, pretty much anyone, whether you have a small business or not. My guest this week is Craig Cody. Craig is a certified tax coach, certified public accountant, business owner, and former NYPD officer with 17 years experience on the force. In addition to being a certified public accountant for the past 15 years, he is also a certified tax coach.
As a certified tax coach, Craig belongs to a select group of tax practitioners throughout the country who undergo extensive training and continued education on various tax planning techniques and strategies to become, as well as remain, certified. With this organization, Craig has coauthored an Amazon bestseller book, Secrets of a Tax Free Life.
Now, in this episode, we talk about the biggest mistakes small business owners make regarding their taxes, strategies medical providers specifically can use to lower their tax bill, retirement planning vehicles that are right for you, and how can proactive tax planning help private practices.
Now, aside from all of this great information you're going to get on this podcast, Craig has a free gift for everyone, 10 biggest tax mistakes that cost business owners thousands. So if you want this free gift, head over to podcast at healthywealthysmart.com and get this free gift from Craig. I have it. It's great. We talk a little bit about some of this in the podcast, but it goes into much more in depth in this free resource. So check it out at podcast at healthywealthysmart.com. Under this episode, click on the link and get your free gift. And on that note, enjoy this interview with certified public accountant, Craig Cody.
Hey Craig, welcome to the podcast. I'm really excited to have you on to talk about taxes.
Well, thank you very much for having me. I'm happy to be here.
And how often have you heard someone say, I'm excited to talk about taxes.
If they're not from my inner circle, not often.
Exactly. Now, a lot of my listeners are business owners. We're small business owners, entrepreneurs. So I think learning about taxes, what we can do to maximize what we take home, so keeping more of what we earn, and what are mistakes that we don't want to make. So let's start with that question. What are the biggest mistakes you see small business owners making regarding their taxes?
The biggest mistakes I see is people failing to plan. So they're going to buy a car. They're going to buy a piece of equipment. They do all this research. It comes time for tax time, there is no planning. Maybe planning, maybe sitting down with their accountant in December to figure out how much of a payment they need to make by January 15th. That's not proactive planning. That's just being reactive. So taking the time to communicate with your CPA and figuring out a plan where you could keep more of what you make.
And how do we do that? What should we be looking out for?
Correct. So let's talk about having the right business entity that you're operating out of. So many times the business entity is, you know, I'm starting a business. They talk to the attorney, the attorney says, okay, form an LLC, form a Corp, form an S-Corp. Or they hear somebody else say, Oh yeah, do an LLC. And that's how they decide what type of an entity they're going to work out of. Instead of having maybe the attorney, the business owner and the CPA sitting down or having a phone conversation say, okay, what makes the best sense for us to operate from a liability point of view and from a tax point of view. And a lot of times you can have your cake and eat it.
And so what questions, if I'm a potential entrepreneur or business owner, what questions should I be asking my CPA about what business entity is best for me?
You should be saying what's going to work best in my particular situation so I'm able to minimize the amount of tax I pay. So, and that's all prefaced by is this a side hustle? Do you have any other entities that you work out of? You know, what else is going on in your life? Do you have a spouse? Does that spouse have income? And then taking all that information together they can figure out, okay, maybe you need to be an LLC or maybe you need to be an LLC taxed as an S corporation. But by having that conversation, you'll figure it out. And you know, you could save $8,000 to $10,000 a year by having the right entity.
Wow. So what's the difference? What's the difference between an LLC and an S Corp, from a tax perspective?
From a tax perspective, the main differences is self employment tax. On an LLC, that's taxed as a sole proprietor or a partnership, you're paying self employment tax on every dollar of net income. Whereas if you're an S corporation, you're going to pay reasonable compensation and pay self employment tax on that and everything above that reasonable compensation is not subject to self employment tax. So depending on where reasonable compensation is, depending on what else you have going on in your life, one or the other can make sense. So you have to do an analysis. It's not a hard analysis. You just have to take a little bit of time.
And let's say, let's take an example. Okay. So let's take me as an example. So I want to start a small physical therapy business where it's just me right now. I don't have any employees. I don't have any dependents and I'm not married. So what would make the most sense for me or what, like how would this conversation go between us?
So is this your only source of income?
For simplicity sake, I'll say yes.
Right. For this conversation, okay, it's your only source of income and what do you expect to make your first year?
And what do you think you'll do your second year?
Okay. So maybe an LLC might work best, but the wonderful thing about an LLC is we could also make a late election at some point and decide that, you know what, maybe I really wanted to be taxed as an S corporation instead of a sole proprietor. So it gives us a lot of flexibility to see how things wind up.
But why would the LLC work best for me in my situation?
Well, maybe because the amount of self employment tax you're going to have to pay after all your expenses is not going to be that great and the difference between having an S corporation and additional compliance that needs to be done on an S corporation and the savings in self employment tax, there's no benefit there. But when it comes down to dollars and cents, I'm sure if I told you, you know what, if we made an election and it was going to save you $10,000 a year, you'd probably say, maybe it makes sense.
Absolutely. Yeah, absolutely. And now what else?
Oh, sorry, go ahead.
So, and another thing that, as we're talking about entities, we talk about the new tax rules, right? And there's something in a new tax rules called a qualified business income, which has to do with pass through, such as your S corporations and your LLCs. And what that does is it gives you a pass through deduction of up to 20% of what your pass through income is. All right. So that sounds like a wonderful thing, right?
Yes, it does. Can you, before we go on, can you just quickly define what you mean by pass through income?
Anyone that operates as a S corporation, a sole proprietor or an LLC, whether it's a partnership or a single member LLC, that income flows through to you on a K1 or Schedule C and is considered pass through income. So the actual entity doesn't pay a tax. All right. The income flows through to you personally and you pay the tax personally.
And what the government is saying now with this section 199 and qualified business income is we're going to give you a 20% deduction for whatever that income is. And you have to meet certain parameters, which is a great thing, except for guess what, you are professional. So with professionals, there's caps you have to look out for, and those caps vary based on your filing status. So a single person, it's going to phase out at around $165,000. So you want to see what kind of planning can I do so I'm underneath that cap and I don't lose that 20% deduction.
Got it, got it. Oh my gosh. This is so confusing.
This is why I always tell people when they ask me about, Oh, do you do your taxes yourself? And I'm like, no.
Well, you know ...
Because there are too many other variables happening here.
Correct. I have a bone saw in my office. Okay. So I could probably do amputations if I wanted to. It's probably not a good idea.
Yeah, probably not.
Right. So I keep that as a reminder that we should do what we're good at and let other professionals do what they're good at.
Exactly. Exactly. We kind of gave an example of using me as an example, when it comes down to how to choose the right business entity. And that's part of your, like you said, it's part of your planning and part of making your plan.
What are some other big mistakes that you see small business owners making?
Well, there's audit paranoia.
You know, people, oh, I can't. If I do that, I'm going to get audited. Well, first of all, very few people get audited and if you're doing it and you're doing it correctly and you're documenting it, all right, most audits are just mail audits. They may ask you for something, okay, which is still rare to begin with. But as long as you have everything documented and you get a notice, you respond back or you have your CPA respond back with it. Here's what we did. Here's the correct documentation on how we did it. So if the government allows you to do it, then document it that you're doing it correctly and do it.
Another issue we see is having the wrong retirement plan or no retirement plan at all. People not thinking about that, Oh, I'm just going to do an IRA. And maybe I could do $6,000, but maybe you might've had another plan that you could have did $20,000 and you had the cash to do it.
So just taking a little bit time and doing that. Hiring your family, whether it's your kids or your spouse, maybe they're doing work in your business, depending on the type of entity you have, you can actually pay your kids and not actually pay any FICA tax, if you have the right type of entity. If your kids are working in your business, we have a lot of clients where they do that and the kids take the money and they put it into a Roth IRA. And next thing you know, by the time they're 18 years old, they have a ton of money saved up.
Or I had written a chapter in my first book, which is the Secrets of a Tax Free Life, on paying for your child's cleats. And it was basically about have you child work for you, document it, put that money into his bank account and then use that money to pay for whether it's summer camp, hockey camp, whatever it is. So you're actually making those expenses tax deductible.
When you said you may have the wrong retirement plan or no retirement plan, what kind of advice do you give to people when it comes to putting some of their money away into different types of retirement possibilities?
Well, we work with them to figure out what's going to give them the biggest bang for their dollar. What type of plan is going to work for them, as far as, allow them to put away more money tax free, and then they'll typically have somebody that they're working with or they worked with or who's been referred to them to help them on the actual investment side. All right. But they need to get the money there first, before it could actually go to work for them. And having the right retirement plan is a good way to go and it's amazing some of the things you could see in a retirement plan where the more money you make, the more money you can put away. And then there's some other very ingenious things you can do, as the numbers get higher.
Another thing that we see people miss is having a home office and a home office might not be a huge deduction because maybe you use 5% of your home. You have an office somewhere that takes up 5% of the space, but now you can write off 5% of your maintenance costs, 5% of utilities, 5% of your real estate taxes, which are now capped out under the new tax rules so that helps.
But what that does is it opens up two wonderful things. It opens up now you're traveling from one office to another office, that becomes the deductible. And it also opens up the home athletic facility, which can be your home gym or your home pool, now becomes a deductible expense for your business.
Who knew all of these things were possible?
Exactly. So, and it just takes a little bit of planning. You know, not expecting to get this stuff done in March for the year before. Of course, it can happen.
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Yeah. When do you suggest people reach out to an accountant, if they don't have one, or to their accountant to start planning for, let's say we want to start planning for next January, you know, or next April, whatever, when taxes are due. When do we start reaching out to our accountants to get this planning done?
After they're done listening to this podcast.
Okay. So pretty much now.
Correct. Because the more time you have, the more things you can do.
Yeah. That's makes a lot of sense.
You know, and this is the time of year to do it because this is the time of year where people aren't up against deadlines and they have the time to sit with you and do what needs to be done.
Got it. So basically let's not wait until January or February when your accountant is working a hundred hours a week, but rather let's talk about this now, when things are a little bit quieter.
And for most planning, January, February is going to be too late. Other than some retirement plans, January, February is too late. You know, the year has ended.
And how much of your income should you be putting into a retirement plan?
Well, it depends on obviously your personal expenses, how much you can afford to put away. So there's no specific item, but the standard set is going to give you about 20%. A 401k is going to let you do about $18,000 on the first $22,000 worth of compensation. So that's what planning also comes into, the whereas maybe you're not making so much money, but maybe your spouse makes a lot of money and maybe you want to be able to put more of your money away so maybe that's where your entity needs to be structured so you could put more money into a 401k versus a self employed pension plan. So there's so many different things that come into play that taking the time to plan will allow you to do what's best for you.
And what about IRAs? Traditional IRAs versus Roth IRAs?
Right. Well, traditional and Roth, obviously the data is the younger you are, the better off you're going to be with a Roth because that money is going to compound and be tax-free down the road. Whereas the older you are, the less tax-free compounding you're going to have. You know, so there it comes down to a bit of a personal choice, but there's a cap on the amount that you could do. It's around $6,000, $6,500, depending on your age, etcetera. So, and that you can do up until April 15th, but that's not planning. That's okay. It's April 15th. Okay. I haven't done anything. Let me put $6,000 away.
Yeah, that's crazy.
When maybe I could have put a lot more money away.
Yeah. I try and put money into my Roth IRA throughout the year.
Right, which is obviously the best way to do it because it's like being on a budget.
The same way about putting money away for taxes. It's, to plug the book, Profit First, pay yourself first, put money aside for taxes, and then there comes the rest of the business expenses.
How easy is that? Right.
Just have to do it.
Well, yeah. Easy in theory. The practical application is always the hard part. I find that with physical therapy too. Easy in theory, but then the patients, getting the patients to adhere to that is always the hard part and I'm sure your profession is as much the same.
We've talked about all of this planning. So what is proactive, when you say proactive tax planning, how can it minimize your taxes?
Well, having that conversation today versus next January, February, March, or April. That's being proactive.
Looking for ways you can legally reduce your liability, keep more of what you make, because most CPAs, most accountants, they're really good at putting the right numbers in the right boxes. All right. But it ends there. So being proactive is having that conversation today. How can I save more money? You know, how can I put more away from my family? How can we pay for that trip that we want to take? Whatever it is. How can I have more money available for my business so I could grow my business? Through planning.
And how often should we be speaking with our CPA? Is this a check in once a year? Is it every quarter? What do you recommend?
At the very least, it's every quarter. We like to speak with our clients on a monthly basis. We get to have PNLs done every month, we email them out to them and we send them a link and they can schedule a call. And we usually have, it could be a five minute call, it could be a 45 minute call. It depends. But taking the time to schedule it, looking at the PNL, because if you're a business owner, your profit and loss and your balance sheet are the two things you should be very aware of so you know what's going on, because sometimes you think you're making money, okay, and maybe you're not.
Yeah. I know. Sometimes you're like, wait, where'd all this money go? I worked so hard this month. Why I don't have any money? What's happening here?
Exactly. What's going on?
Yeah. What's going on? And that's where the CPA can come in to kind of help you discern what's going on.
Correct. And too many people look at the CPA or accountant as an expense item. You should look at it as an income item. If you work with them and you work with them the right way, they can actually help you generate income versus be an expense.
Yeah. I love that. And oftentimes, I see it all the time. How much is your accountant? Do I really need to pay someone to do this? Can't I do it myself? But I like that, looking at it as more of an income versus an expense, because in the end, the professional who knows more than you do, probably, will help you keep more of your money.
Correct. Well, if you wind up paying more money, but you're saving $20,000 a year in taxes, it's pretty much a no brainer.
Yeah, for sure. We could maybe take five of the most expensive tax mistakes that cost business owners money. What would those top five most expensive mistakes be?
So some of them we've talked about. The wrong business entity, right? The wrong retirement plan, missing hiring your family. One we did not talk about was medical benefits.
You know, everyone's heard of HSAs and flexible spending accounts, but have you heard of medical expense reimbursement plans under section 105 of the tax code?
What is that?
Depending on the type of entity you have, it's a medical expense reimbursement plan and it depends on the entity you have, and that's where planning comes in and that allows you to write off dollar for dollar expenses that are medical. So maybe you have kids that need braces and that's going to cost you six or seven grand out of pocket.
And you know, where if you put them on Schedule A, you probably don't meet the threshold to get to deduct that. But if you have a medical expense reimbursement plan, you actually get to deduct the whole amount. We've had clients where they're a little bit older and maybe they need cosmetic dentistry and it's going to cost them $20,000-$25,000.
Oh, so expensive.
Right. Now, all of a sudden they could write that off.
In a 25% bracket, you're saving seven grand.
That's amazing. Yeah. That's great advice. Okay. What else are some of those expensive tax mistakes?
The home office, car and truck expenses, which is something that opened up when you have the home office, and really making sure you've done what you need to do to qualify for the qualified business income section 199 deduction.
What is that?
That's that 20% deduction we talked about earlier.
Oh, that's the 20% deduction. Yeah. Okay.
So those are the big ones.
Okay. So these are all things. So for all the listeners out there, when you go to meet your CPA, ask about these things. Right?
Yeah. I say, I ask people, when was the last time your CPA came to you with an idea to save you taxes? And I usually get that glazed over look, all right. And it takes two to tango. Okay.
It's not always just their fault. You know, people tend to not want to reach out and call their accountant because they're worried that they're going to get hit with a bill. So you need to communicate. And by communicating, you will save more money, if you're working with the right people.
Absolutely. Well, this was amazing advice. I mean, I'm actually going to be calling my accountant.
And talk about a lot of this stuff because this is all news to me, but I love hearing it. I love being more knowledgeable about how you can save yourself money in your business.
Exactly. Keep more of what you make and $20,000 a year is a hundred grand over five years. What can you do with that?
Yeah, absolutely. You can put a down payment on a house.
Maybe. Well, maybe not in New York City, but in other parts of the country, you definitely can. This is great advice. Thank you so much for all of this.
Oh, you're welcome.
Now you have, I think, a little extra gift for the viewers. So could you talk about that and where they can find it?
Sure. It's my most recent book, which we updated for the new tax code. It's called the 10 Most Expensive Tax Mistakes That Cost Business Owners Thousands. And we will actually send the listener a free paper copy of that book. And we will give you the link, but the link will be www.craigcodyandcompany.com/drlitzy. L-I-T-Z-Y.
And there'll be a form there to opt in and we'll get that book out to them.
That's awesome. So listen everybody, take advantage of this, learn how to save money in your business. I mean, we all want to save money. We all want to maximize. We work hard and you want to maximize what you can keep versus giving it to the government, if you don't have to. Right?
Correct. Correct. You know, pay what you're legally obligated to pay.
Yeah, absolutely. Absolutely.
Warren buffet does it. You know, they all do it. Why can't we?
I cannot think of a reason not to. Now, before we head off of this call, I'm going to ask you the same question I ask everyone. And that is, knowing where you are now in your life and in your business, what advice would you give to yourself as a new graduate right out of, let's say, right out of college?
Do what you like. Okay. Do what you're passionate about and figure out a way where you could legally make money doing it.
I think that's great advice. And now where can, outside of this book, where can people find you if they have questions?
Well, our website is www.craigcodyandcompany.com. Also, the phone is (516) 869-4051. And the email is firstname.lastname@example.org. And we will give you all that information for the show notes.
Fabulous. Thank you so much. And everyone, we will have, like Craig said, we will have all of this in the show notes. You can click, click, click, click to where you need to get to for his free resource. And if you have more questions of him and I highly highly suggest, and I say this all the time, hire an accountant. Craig, I'm sure you agree.
Oh, most definitely. Most definitely.
Do not, like Craig said, he's not going to treat a wonky knee, just like I shouldn't be doing my own taxes.
You know, stick with what you do well. Let professionals handle things, because in the end, they'll save you money. Craig, thank you so much for taking the time out today and coming on the podcast. I appreciate it.
Thank you very much for having me. I appreciate it. Thank you.
Yeah. And everyone, thanks so much for tuning in. Hopefully you took lots of notes and got some great tax tips. Have a great couple of days and stay healthy, wealthy and smart.
A huge thanks to Craig Cody and all that great advice. And of course, a big thank you to Net Health for sponsoring today's episode. Net Health is ReDoc, powered by xfit, which is a cloud based fully integrated EMR and billing solution. Plus, you can opt in to completely outsource billing services. That's the best way to optimize revenue. Imagine PT billing, coding, and compliance experts taking the back office, work off your hands and reporting to you. To learn more about ReDoc and the complete revenue cycle management services, check them out at nethealth.com/healthy.
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