The struggles of entrepreneurship are immense, the chances of success are slim, and the cost of failure is daunting. But many startup and small business owners don’t understand how to leverage expert CFOs (Chief Financial Officers) to help them build a successful business and achieve their goals. This article will provide an understanding of 6 benefits a CFO should bring to your business and how you can use their skills to succeed in your business.

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Most Business Owners I interact with:

• Feel stuck in their business

• Don’t have enough money

• Don’t know what is working and what isn’t in their business

• Don’t have clear goals or a path to a successful, profitable business

• Don’t make meaningful progress year-over-year

• Are stressed, frustrated, confused, and isolated

These feelings are almost universal, but most business owners feel very alone in their struggles at the top of their growing company. Many don’t understand how a CFO is best suited to walk with them as a trusted advisor and help them solve these problems.

Those business owners who know a CFO can help them often don’t know how to evaluate or leverage their skill sets to make them successful.

Questions Business Owners Have About Hiring a CFO:

• Why do I need a CFO?

• When do I need to hire a CFO?

• What does a CFO do?

• What should I expect from a good CFO?

• Who should I hire as my CFO?

• How can I get the most out of my CFO?

Whether you’re curious about hiring a CFO for your business someday, wanting to challenge your CFO to deliver more for your business, or looking to replace your CFO, the remainder of this article presents a clear vision for this role and how a CFO should be best leveraged to make your business successful.

Successful Entrepreneurs Leverage Expert CFOs to:

1. Generate Consistent, Positive Cash Flow

2. Increase Profits

3. Provide Expert Financial Analysis

4. Increase Business Value

5. Build Accurate Financial Models and Forecasts

6. Develop Better Business Models

Let’s jump into each of these areas in detail:

1. Generate Consistent, Positive Cash Flow

No business ever failed with consistent, positive cash flow. This is the first priority for every good CFO. An Expert CFO manages Consistent, Positive Cash Flow through:

• Analyzing and Managing Your Margins (Gross Margin, Net Margin, Contribution Margin, Costs as % of Sales, etc)

• Improving and Maintaining the Cash Conversion Cycle (Payables, Receivables, Inventory)

• Obtaining and Managing Financing (Additions or Repayments of Debt & Equity, Financing and Investor Relationships)

2. Increase Profits

After Cash Flow, the next most important driver of success is improving the profitability of the business. CFOs specialize in:

• Strengthening Revenue through improving Pricing, Volume, and building Recurring Revenue

• Improving Gross Profit and Cost of Sales by Product and Service Margin Analysis, Cost Controls, and Negotiations

• Increasing Net Profit by Managing and Reducing Operating Expenses, Overhead, and Taxes

3. Provide Expert Financial Analysis

A CFO can not only expertly dissect and analyze the financials but can also translate those numbers into tangible goals and accountability for each key stakeholder in the business. A CFO should be able to:

• Explain the “story” of the business from the financial reports (Balance Sheet, Profit & Loss, Cash Flow Statement, etc.) in terms that everyone in the business can understand

• Track Revenue, Profit, Cash Flow, and Financial Health and communicate in clear scoreboards and metrics to relevant stakeholders

• Analyze the business’ financial strengths and weaknesses and know what to do to change, when, and how.

4. Accurate Financial Models and Forecasts

A good CFO looks to the future and makes goals a reality through robust financial models and forecasts. Find a CFO for your business who can:

• Build an Accurate Financial Model for your business to see the consequences of business decisions years in advance

• Set Accurate Financial Targets with Clear & Relevant Operational Objectives, Key Results, and Key Performance Indicators

• Provide you as the Business Owner with accurate information for confident decision-making so you know you are going in the right direction and what the results of your decisions will be

5. Develop Better Business Models

Sometimes Entrepreneurs are simply building the wrong business to get where they want to go. A CFO should be able to help you understand your business model and determine whether it has what it takes to go the distance for you. Make sure your CFO helps you:

• Understand what is and isn’t working in your business and provide clarity on corrective actions

• Help Reinvent, Adapt, and Optimize your Business Model

• Provide clear feedback and direction on how the business model is performing and how to improve

6. Increase Business Value

Your business is likely one of your most valuable assets. A CFO should help you increase the value of your business exponentially by:

• Reducing Dependence on the Entrepreneur in day-to-day operations

• Building Sustainable, Recurring Revenue from a Diversified Customer Base

• Proving your Growth Strategy and Demonstrating Scalability

• Maintaining Good and Improving Cash Flow

• Establishing Financial Foresight and Controls

Are You Reaching Your Goals?

What I hope I have shown you in this article is that you need to leverage an expert CFO to help you reach your full potential for financial transformation and success in your business, however you define success for you.

So what does success look like to you?

• Building Work-Life Balance?

• Reaching your Retirement Goals?

• Securing Your Family’s Future and Legacy?

• Transferring your Business to a Family Member?

• Giving back to your Community, Charities, and Employees?

• Building your Next Business?

Don’t keep spinning your wheels. If you aren’t making the kind of progress you’re looking for in your business, leverage the expertise of an Expert CFO to get you moving toward your goals.

If you’d like to discuss what CFO services could look like for your business, please reach out to me for a consultation and financial analysis to see how CFO services can help you be successful in your business.

Trump’s campaign has drummed up a lot of discussion about taxes, tariffs, and the best plan to strengthen the economy and support American workers.

In particular, the conversation has turned to Income Tax vs Consumption Tax in a recent New York Times article.

Here’s what you need to know and why it matters:

• Income Tax: You are taxed on the income you earn or receive

• Consumption Tax: You are taxed on the money you spend.

What most don’t understand is that although we have what is called an Income Tax, it is already functioning like a consumption tax - at least for those who are positioned correctly to take advantage of these savings.

Here’s how it works:

• Employees get taxed on all of their income - they aren’t in position for any tax savings

• Business Owners and Investors get taxed the money they save or spend on themselves.

• What they reinvest into their business or investments reduces their income, thereby reducing their taxes.

This makes sense at one level, but if it is this simple, why do business owners get it wrong so often and end up with huge tax bills?

Why Tax Planning?

The reason is that the tax code is a labyrinth of rules and regulations for how you can structure and flow your expenses and investments to qualify them for reducing taxes.

What this means for Business Owners and Investors is that they need to plan ahead to position themselves and their investments and expenditures to ensure they can take full advantage of the tax savings available to them.

This is Tax Planning, which includes:

• Evaluating your current and future income, assets, and life situation,

• Along with your wealth-building goals, future income, retirement, and estate plans,

• To prepare a strategic plan to position you to

• Accelerate your wealth creation and

• Result in the lowest tax liability.

The difference? When we work with Business Owners and Investors with Tax Planning, we are regularly helping reduce our clients’ tax bills by 20-50% or more, resulting in $20k to $1mm+ in tax savings.

What Tax Planning Looks Like

What does this look like? It’s likely going to be a bit different for each Business Owner or Investor. Here is a rough sketch of some key strategies we’ve worked on for different clients:

Real Estate Investors

• Structuring activity to avoid passive loss limitations

• Maximizing Depreciation through Cost Segregation

• Partial Asset Disposition Elections

• 1031 Exchange

Small Business Owners

• Maximizing Deductions

• Bonus Depreciation

• Hiring Children

• Entity Structure Optimization

Medium-Sized Business Owners

• Section 1202 Small Business Stock

• Captive/Financed Insurance

• R&D Tax Credit

• Energy Tax Credits

• Trusts

Investors

• Self-Directed Roth IRA

• Leveraged Film Investment

• Leveraged Asset Donation

• Charitable Holding Company

• Estate Tax Planning

It’s your money you are earning and investing - close the loop with Tax Planning to keep your hard-earned money to maximize your wealth.

Interested in what Tax Planning can do for your year-end tax bill? Reach out for a free consultation to review your financial and tax situation.

Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance of BOI Reporting. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your situation.

A complete walkthrough of this article is available through the video below:

💡 Key Takeaways - Tl;dr:

• Step 1: Determine When Your BOI Report is Due

  • Startup in 2024: 90 days after formation

  • Everyone else: 12/31/2024

• Step 2: Discover if Your Entity has to Report

  • Yes: If you filed with the Secretary of State

  • No: Non Profit, Large Company, Inactive Company, Trust, or Other Exception

• Step 3: List Which Individuals Qualify as “Beneficial Owners”

  • 25% or more Control or Ownership

  • Individuals with Substantial Control

  • Company Applicant

• Step 4: File Your BOI Report

  • Gather Company & Beneficial Owner Information

  • Go Online to File

• Step 5: Keep your BOI Report Up-to-Date

  • Business Changes

  • Beneficial Owner Changes

Why Do I Have To File This???

Every few years, the government seems to find another onerous reporting obligation for business owners to comply with. They usually group this reporting in with tax return filings to simplify compliance and the ease of processing the required information.

However, this year we see a new layer of government reporting under FinCEN, the Financial Crimes Enforcement Agency, that extends to more than 36 million businesses and their innumerable owners and key persons. This new filing requirement is called the Beneficial Ownership Information (BOI) report and it requires each business to report the personal identifying information about a company’s owners and key employees and decision-makers. Basically, they want to know every part of your wealth and control of businesses to make sure you’re doing the right thing… what could be nefarious about that?

Leaving aside my personal feelings about this whole thing, the reality is that it does need to be done if you are going to keep your business open, unless you want to take the government to court.

I’ve had a number of my clients already call and ask about what they need to do. They’ve watched some videos or read some articles, but they are still unsure about what exactly is required and how to go about doing it.

They are right to be proactive on this filing, because the cost of noncompliance for owners and senior officers is up to $500 per day in addition to criminal consequences which may include imprisonment for up to 2 years and/or a fine of up to $10,000. It’s all stick and no carrot on this one.

Here’s the question I want to help you answer:
Is this BOI filing easy enough for a business owner to do themselves; or do they need to hire a lawyer or accountant to take care of it for them?

I’ve promised my clients that I will write this article and put enough resources together that they or anyone can confidently complete this filing requirement.

The purpose of this article is to help you understand what BOI is, who needs to comply, what you need to do, when the deadlines are, and how to complete the filing. I will walk you through step-by-step so that you can complete this filing for each entity you are a beneficial owner of and avoid the penalties of mistakes and noncompliance.

The reporting itself is fairly straightforward, but determining which businesses and which individuals need to be included can be a bit tricky. You need to take the following steps to be compliant with your BOI report:

• Step 1: Determine When Your BOI Report is Due

• Step 2: Discover if Your Entity has to Report

• Step 3: List Which Individuals Qualify as “Beneficial Owners”

• Step 4: File Your BOI Report

• Step 5: Keep your BOI Report Up-to-Date

Step 1: Determine When Your BOI Report is Due

First things first - you need to know what the timeline is to complete this report so you know whether you need to get on it now or if you have some room to work on this. Keep in mind that if you fail to report your information on time, the penalties are $500… per day… that can add up quickly.

As of the writing of this article, the timeline for completing this report is as follows:

• Reporting Entities in existence before December 31, 2023

  • Filing Deadline: December 31st, 2024

• Reporting Entities formed from January 1st, 2024 to December 31st, 2024

  • Filing Deadline: 90 Days from the initial filing with the Secretary of State

• Reporting Entities formed after January 1st, 2025

  • Filing Deadline: 30 Days from the initial filing with the Secretary of State

  

Step 2: Discover if Your Entity has to Report

The second step is for you to determine whether your entity has to file a report.

A BOI Report is required for any entity that is created or registered by forming a document with the Secretary of State including (but not limited to):

• Limited Liability Company (LLC)

• Limited Liability Partnership

• Corporation (C & S Corp)

• Partnership (Limited & General)

These “reporting entities” are required to file this report unless your entity falls under the following exemptions:

Most Common Exemptions to Filing a BOI Report:

• Nonprofit with active nonprofit status

• Large operating entities with more than 20 full time employees and more than $5M in gross receipts.

• Trusts that meet the requirements in paragraph 1 or 2 of the Internal Revenue Code Section 4947.

• Inactive Entities are exempt from reporting if they meet the following requirements:

  • In existence before 1/1/2020

  • Has not engaged in any active business

  • Is not owned by a foreign person

  • Has not experienced any change in ownership in the last 12 months

  • Has not sent or received any funds of more than $1,000 in the last 12 months

  • Does not hold any kind or type of assets in the USA or abroad, including ownership in another entity

Less Common Exceptions

Step 3: List Which Individuals Qualify as “Beneficial Owners”

The next step before you file your BOI report is to make sure you know who your Beneficial Owners are and collect all their relevant information to prepare for your filing. This is the most complex part of this process for most filers, so I will spend a little more time on this section.

Key Tests for Beneficial Ownership:

• Ownership

• Substantial Control

• Beneficial Ownership Exceptions

• Company Applicant (not Beneficial Owner, but information required)

Business Owners who are required to be a part of this filing include:

• Any individual who owns 25% or more of a reporting entity

• Any individual who controls 25% or more of a reporting entity

• Ownership or controlling interest is that which is obtained through any of the following:

  • Equity

  • Stock

  • Capital or Profit Interest

  • Voting Rights

  • Any instrument, option, non-binding privilege, contract or mechanism convertible into any of the above forms of ownership.

Individuals with Substantial Control who are required to be a part of this filing include:

• Senior Officers (i.e. CEO, CFO, COO, CXO)

• Members of the Board of Directors

• Those who have authority to appoint or remove senior officers and members of the board of directors or governing body

• Those who make, direct, or influence the company’s important decisions like reorganizations, mergers and acquisitions, making amendments to the company’s governance documents, adding or removing lines of business, expanding into different markets, determining senior officers’ compensation structures, dissolving the business, entering into contracts, and selling or leasing principal assets, etc.

• Those with indirect substantial control including control of intermediary entities that exercise substantial control, financial or business relationships with other entities or individuals acting as nominees.

Examples for How to Determine Beneficial Owners

The following examples are detailed in the BOI Small Company Compliance Guide and provide helpful and practical insights into how to determine who are the beneficial owners. A picture is often worth a thousand words, so hopefully you can find a situation similar to yours in the following examples that will help you know who qualifies as a Beneficial Owner.

Example #1: Single Member LLC

Individual A is the sole owner and president of the company and makes important decisions for the company. No one else owns or controls ownership interests in the company or exercises substantial control over the company.

✅ Individual A is a Beneficial Owner through both exercising substantial control and owning more than 25% of the company’s ownership interests

Example #2: Corporation with Varied Ownership

The company’s total outstanding ownership interests are shares of stock. Three people (Individuals A, B, and C) own 50 percent, 40 percent, and 10 percent of the stock, respectively, and one other person (Individual D) acts as the president, for the company, but does not own any stock.

✅ Individuals A, B, and D are all beneficial owners of the company. Individuals A and B own more than 25% of the company, and Individual D exercises substantial control.

❌ Individual C is not a beneficial owner due to owning less than 25% of the reporting company and not exercising substantial control.

Example #3: LLC With Management and Non-Management Shares

The reporting company is an LLC with two managers, Individuals A and C. Individual A also owns 50 percent of the “membership units” in the LLC while Individual C does not. Individual B owns the remaining membership units in the LLC but is not a manager.

✅ All three individuals are considered beneficial owners in this case. Individual A due to business ownership and substantial control as a manager, Individual B due to business ownership, and Individual C due to substantial control.

Example #4: Complex Ownership Structure

The reporting company is a corporation with multiple indirect owners through Company Y and Company Z. In this example, Individuals A, B, C, and F are beneficial owners. Review the diagram and then see the notes below for a deeper explanation.

• ✅ Individual A: Yes due to Substantial Control as a CFO. Yes also as an Indirect Owner due to owning 27.5% of the Reporting Company (Company Y 50% x 30% = 15% + Company Z 50% x 25% = 12.5% = 27.5%).

• ✅ Individual B: Yes as an Indirect Owner of 35% of the Reporting Company (Company Y 50% x 70% = 35%)

• ✅ Individual C: Yes due to Substantial Control as the Reporting Company’s CEO and President.

• ❌ Individuals D & E: No due to not owning more than 25% of the Reporting Company or exercising Substantial Control.

• ✅ Individual F: Yes due to Substantial Control as a member of the Board.

Company Applicant Information

• The only other individual besides the beneficial owners whose information is required is the Company Applicant.

• This is only for entities created or registered after January 1, 2024

• The Company Applicant is the individual who filed or directed or controlled the reporting entity’s formation or registration documents.

Exceptions for Individuals Being Included in this Filing

• An employee (not in a senior position) whose control or economic benefits from the reporting company are derived solely from their activities as an employee.

• An individual who has only a future ownership interest through a right of inheritance (once they inherit the interest, they must be reported)

• A custodian, nominee, intermediary, or agent of another individual who meets the beneficial owner definition

• A minor child (information about a parent or guardian must be reported instead)

• Creditors of the reporting company

The Information you need to collect for each of the Beneficial Owners and Company Applicant includes:

• Full Legal Name

• Date of Birth

• Residential Street Address

• ID Document: Driver’s License, Passport, State ID

• FinCEN Identifier (if applicable, helps streamline completion of BOI forms)

Step 4: How to File Your BOI Report

We’ve confirmed our company is a reporting entity, and we’ve got a list of all the Beneficial Owners and the Company Applicant along with their personal information. You’ll also need your entity information below:

Reporting Company Information Required to File BOI Report:

• Full Legal Name

• Alternate Name: DBAs or trade names used to conduct business

• Principal U.S. Business Address

• Formation jurisdiction information (state, tribal, or foreign)

• EIN (Employer Identification Number) or SSN/TIN (Social Security Number/IRS Taxpayer Identification Number)

• FinCEN Identifier (if applicable)

Now it is time to go online to file your report. Here is the link: https://boiefiling.fincen.gov/fileboir

This can be done one of two ways, either by:

• Preparing a pdf which you will later upload once complete.

  BOIR.pdf

• Or filing directly on the FinCEN website

The process is similar either option you choose, but the pdf allows you more time if you don’t have all of your information, and can be helpful as a record. It also saves time if you have updates as you will only have to make the specific changes and will be able to re-upload the completed report as opposed to completing the whole process from scratch online. As I believe this will be the best option for most people, I will be reviewing how to complete the PDF report in the pictures below:

BOI Report Page 1 - Filing Information

This is likely your initial report, so you will only be selecting box 1a on this page. If you are correcting or updating, you will complete the rest of this information

BOI Report Page 2 - Reporting Company

The second page is for the reporting company information.

You may want to select to receive a FinCEN Identifier for this entity (line 3) if the entity holds ownership interest in other companies. This will enable you to provide the FinCEN ID of your company for the reporting of the other companies instead of each of the beneficial owners’ information each time. This simplifies the process and prevents your personal information from being passed around more than necessary.

BOI Report Page 3 - Company Applicant

Most of you are going to be preparing an initial filing if your company was in existence before January 1, 2024. If so, select the checkbox on line 16 and move on to the final page.

If you began your business after January 1st, 2024, you will need to complete this page with your Company Applicant information.

The Company Applicant is the individual who filed the formation documents with the Secretary of State. You may report up to 2 Company Applicants.

As with the Entity FinCEN ID above, an individual can also obtain a FinCEN ID, though not in the BOI Report. This both simplifies reporting and provides greater security for your personal information. You can obtain a FinCEN ID here: https://fincenid.fincen.gov/landing

BOI Report Page 4 - Beneficial Owners

The final page is where you enter information for each of the Beneficial Owners. Keep in mind that Beneficial Owners can also apply for a FinCEN ID as discussed above, which is preferable if you own multiple entities and would like to simplify this process.

You’ll need a Drivers License, State ID, or Passport available to upload a JPG, PNG, or PDF file 5 MB or less with your report.

Upload Completed BOI Report File

Once you’ve completed your file and attached the relevant documents, return back to page 1 and go through each of the steps to Validate, Finalize, and Save your report.

You can then select “Ready to File” to return back to the BOI Report E-File site to submit your report.

You’ll receive a submission confirmation of your successful filing. You’ll want to print the screen or download the transcript as confirmation of your filing.

Step 5: Keep your BOI Report Up-to-Date

Do you have to file a BOI report every year? No - but you do have to keep your BOI information up-to-date with any changes to the reporting entity or beneficial owners.

FinCEN requires reporting companies to file an updated report within 30 calendar days of when a relevant change occurs or when they realize they provided inaccurate information on the BOI report.

You will file an updated report to:

• Correct a prior report

• Update a prior report

• Indicate a classification change to an exempt entity

Examples include:

• Registering for a new trade name

• Change in Beneficial Owners like a new CEO or change of ownership beyond 25%

• Changes to the Beneficial Owner’s information including new IDs, change of address, or change of name

You won’t have to repeat this filing unless you have any of these changes, but you do need to be ready to make these changes timely to avoid penalties for late filing.

If you obtained a FinCEN ID and your change of address or personal information triggers an update for your company, you also need to update your FinCEN ID information, which you can do here: https://fincenid.fincen.gov/landing

Additional Resources

The information in this article will likely be sufficient for most business owners to be able to complete their own reporting entity filings; however, if your situation is complex or you are looking for answers to your questions, I have provided additional links to resources below for you to review:

• BOI Frequently Asked Questions - hundreds of questions and answers about most every situation

• BOI Reference Materials - the most up-to-date information, regulations, and rules

• FinCEN ID Application for Individuals

• Beneficial Ownership Information Reporting Online - Links to PDF and Online Filing Options

• BOI Filing Help & Resources

• Small Entity Compliance Guide

As mentioned above, a complete walkthrough of this article and the BOI reporting process is also available through the video below:

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Questions or further thoughts? Feel free to drop them in the comments and we can dive deeper!

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If you would like help filing this report, please schedule a meeting with our team to help you complete this filing.

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Discover how to develop a winning tax planning strategy to support your wealth-building goals as a business owner or investor. Learn key strategies to minimize taxes and maximize wealth in this article and tax planning series.

Key Takeaways - Tl;dr:

• Discover how business owners and employees face vastly different tax realities based on gross income vs net income.

• Ready to make a strategic move in your wealth-building game? Transitioning from employee or self-employed to a business owner and an investor is essential - that’s where you’ll find winning wealth and tax strategies.

4 Questions to position for maximum tax savings:

• Where are you starting with your wealth?

• Where do you want to go?

• How flexible is your growth strategy?

• What’s the big picture for your wealth and tax strategy?

Explore 5 Fundamental Strategies to Reduce Taxes: Elimination, Deductions, Conversion, Brackets, and Deferrals.

Subscribe to learn more, build wealth, and save on taxes.

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Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

💡 Key Takeaways - Tl;dr:

• Discover how business owners and employees face vastly different tax realities based on gross income vs net income.

• Ready to make a strategic move in your wealth-building game? Transitioning from employee or self-employed to a business owner and an investor is essential - that’s where you’ll find winning wealth and tax strategies.

• 4 Questions to position for maximum tax savings:

  • Where are you starting with your wealth?

  • Where do you want to go?

  • How flexible is your growth strategy?

  • What’s the big picture for your wealth and tax strategy?

• Explore 5 Fundamental Strategies to Reduce Taxes: Elimination, Deductions, Conversion, Brackets, and Deferrals

If you would like the video/podcast version of this article to watch or listen rather than read, please check out the video below:

This article is the third in our Tax Planning Series, designed for the frustrated Business Owner or Investor who needs to develop innovative and effective Tax Planning Strategies to support their Wealth-Building Goals.

It’s for those who are frustrated with the amount of tax they owe and want to figure out the rules of the tax game and develop a winning strategy.

It is for those who are seeking to build their wealth and grow a business, but hate being set back by the big IRS check that goes out the door every year.

In this article, I’m going to help you understand:

• Where to start with your Tax Planning Strategy

• How to Evaluate your Current Tax Position

• How to Position Your Income and Wealth for Maximum Tax Savings

• How to Apply Tax Strategies to Key Areas

Decoding Tax Planning Strategy

When I dive into tax planning with people, I ask whether they have done tax planning before. Often the most they’ve done is get help with their estimated tax payments or putting an S Corporation together. Very few have actually moved the needle on significantly reducing their tax liability.

Many people come to me knowing that they want to reduce their tax liability but they don’t know where to start. They have wealth-building goals, but they don’t know the strategies or implications of their financial decisions on their tax liability.

To their credit, the tax law is complicated, and the IRS codes are endlessly complex, with new tax laws coming out every year. With all this complexity, how should you approach building your tax planning strategy?

Here are the three simple steps you should take in building a robust tax planning strategy:

1. Understand where you are in relation to the government’s goals

2. Position Yourself for Maximum Tax Savings

3. Apply specific tax strategies in areas of alignment

The second step is the focus of this article. The third is in the following articles, and the first was in the previous article.

What is Your Current Tax Position?

As a recap of the prior article, What The Government Wants with Taxes (and How to Unlock Tax Savings), let’s review the government’s goals below.

Governments Goals

If you haven’t checked it out yet, give it a read. You should ask yourself:

1. What are my goals for wealth creation?

Remember that we aren’t focused on tax savings to spite the government - we want tax savings to increase your wealth.

2. What investment options that the government incentivizes will help me reach those goals?

The best tax planning investments are Business, Research & Development, Real Estate, Energy, Agriculture, Insurance, and Retirement & Estate.

3. What of those investment options will produce the greatest wealth with the least amount of taxes?

This is the question this article and the rest in this series will uncover.

Positioning Yourself for Maximum Tax Savings

The best way to understand how to maximize your tax savings is to get into a position that allows you to both align with the government’s goals and incentives and your own personal goals for wealth creation.

The simplest model I’ve found for understanding how to position yourself is from Robert Kiyosaki.

In Robert Kiyosaki’s book Cash Flow Quadrant, Kiyosaki builds on his framework in Rich Dad, Poor Dad by providing a way of thinking about the world between those who trade time for money through paychecks from others (Employees and Self-employed on the left side) and those who receive money from businesses and investments (right side).

You can read more about the fundamentals of Kiyosaki’s Cash Flow Quadrant as it applies to business here: https://www.richdad.com/cashflow-quadrant-fundamentals

Cash Flow Quadrant and Your Taxes

The Cash Flow Quadrant is a simply yet powerful illustration of how different income and investments are taxed differently.

Here’s a curated video I put together with Robert Kiyosaki and Tom Wheelwright explaining the Cashflow Quadrant and Taxes:

The Cash Flow Quadrant is an excellent basic framework for understanding income and wealth generation at a fundamental level, but it also has a significant impact on how you are positioned for tax savings. Tom Wheelwright showed that you can also include rough tax rates for each of these quadrants as follows:

Do you see?

• Left Side - Employee/Self Employed: You work, get paid, and get taxed. A lot.

• Right Side - Business/Investor: You invest, you earn, you get taxed, but significantly less with many more legal loopholes.

On its face that sounds really unfair, and I’m not going to tell you it isn’t. But tax law has evolved just like water running down hill - it is going to take the path of least resistance to its goals.

Business owners and Investors put up a fight and try to find ways to avoid taxes, while Employees and Self-Employed don’t even show up for the game.

On the one hand, the government has simply had an easier time taxing earned income from employees because they haven’t made a fuss about it. On the other hand, business owners and investors have helped the government get what it wants.

Understand that this discrepancy is a feature, not a mistake, of a tax system that is designed to incentivize certain behaviors

Here’s how the tax game plays out:

Every good Business Owner and Investor views taxes as a wealth drain and an expense that they actively position themselves to avoid to preserve their bottom line profits and wealth.

Most employees and self-employed look at taxes as something they are destined to pay and can’t get out of. Just look at the way a W2 is set up. Do you get a choice to take your whole paycheck? No. It is taken out before you even get paid. In fact, most employees go right along and even increase their withholdings and estimated tax payments and celebrate the refund when they withhold more than they owe! They are relieved that the extraction process is over and try to ignore how much of their hard-earned money just went out the window.

Different Income Types = Different Taxes

While everyone operates under the same tax code, the amount of tax you pay will vary widely based on the kind of income you receive. I’ve included the types of income found in each quadrant below to help you see the differences.

• Earned Income is always charged the highest tax rates and combines ordinary income tax with employment taxes against the gross income earned

• Ordinary Income from businesses is charged high ordinary income tax rates, but this is on the net income earned, not the gross.

• Investment income is charged the lower capital gains and passive income rates, but this is also reduced by passive losses and paper (not cash) expenses like depreciation and depletion

• Gifts and Inheritances are mostly structured for no income tax burden at all, and while the lower and middle class do get some benefit, this benefit is primarily enjoyed by the wealthiest classes.

It isn’t that there is a different tax code for business owners and investors and another for employees and self-employed, but rather the kinds of activities are taxed differently regardless of who is being taxed.

W2 Employees and Self-Employed individuals have earned income, which is taxed at the highest federal and state tax rates as well as payroll taxes and self-employment taxes for Social Security and Medicare. But this isn’t actually the biggest difference between the left and the right side.

Biggest Tax Difference: Gross or Net Income

The most critical distinction in tax planning is understanding gross and net income.

Business owners pay ordinary income tax rates like employees, but not before being able to take deductions to reduce their net taxable income.

Investors are typically taxed at lower rates through most of their income coming from capital gains and passive income, which are all after-expense figures. However, they also get to offset against other expenses and losses as well as asset depreciation like in real estate and oil and gas investments.

The real difference is what you're taxed on - gross or net income. It's a game-changer.

Here is the order of events for Employees vs. Business Owners that shows why Employees will always be taxed higher than Business Owners.

Here’s the key: if an employee and a business owner make the exact same top line income, the business owner will always pay less in taxes.

Here’s a video I put together explaining these differences in greater detail:

Key Distinction between Self-Employed and Business Owner:

You may be someone who falls into the Self-Employed category. You might be asking yourself whether you are Self-Employed or a Business Owner?

Here is a key strategy we use to make this distinction and move you from Self-Employed to Business Owner:

Schedule C or S Corporation?

If you are still filing your business as a Schedule C, you are predominantly in the Self-Employed category.
If you have an S Corporation, you have taken the first step to being a Business Owner.

What’s the difference?

S Corporation owners are able to pay themselves a Reasonable Salary for their earned income (left side of the quadrant) and take their dividends as owners (right side of the quadrant). This enables them to reduce Self-Employment taxes on the value the business is bringing them beyond their invested efforts.

There are rules to follow which I have detailed in another article, but this is an excellent, straightforward strategy that will deliver you ongoing savings for years to come.

Incentives Given to Employees vs Business Owners and Investors

The Government is always going to provide Business Owners and Investors with the best deals because they are the ones with the ability to give the Government what it wants: economic growth and stability, social welfare, and national security.

This next chart shows where the majority of the partnerships and related tax savings occur between the government and its citizens:

Ultimately, what this chart shows is those who are passive and those who are active participants in this game of tax.

You can either partner with the government and engage in the strategic positioning of your assets and wealth, or you can draw back and let the game be played at your expense.

When we add to these quadrants the amount of tax planning strategies and savings options available to each quadrant, the differences become glaringly obvious.

If you want to build wealth and save taxes, you must play the game as a business owner and an investor.

Paid Subscribers will get the following below:

• Apply Tax Strategies to Key Areas of Alignment

• 4 Questions to Maximum Tax Savings

• 5 Ways to Eliminate or Reduce Income Taxes

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This is a shorter post available to everyone where I want to share a common problem that I see. I’d like to share these insights as situations come up in my work with clients that I think will be relevant to others.

Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

In the busy days and long nights of tax season, it’s become a recurring theme in my conversations with clients: they are struggling gathering their tax information, and as we review and prepare their returns, we are discovering gaps in their current year’s data or in previous years’ filings with their old accountant.

We give them the choice:

• Invest in delving deeper to solve these issues or

• Proceed with the information as-is and file.

Most opt for the latter.

I understand the thinking - we don’t want to do the work, it’s a headache, it’s annoying, we just want it done. More complexity and higher tax prep fees? Or just get it done? If we ignore it and avoid it, maybe it will all go away.

But the cost… the cost comes when they receive the final return and a tax bill they have already resigned themselves to pay. I’ve had multiple phone calls shortly after we’ve delivered tax returns with clients who are blown away by their tax bill. Why? They just wanted it filed… they didn’t want the underlying details to get ironed out, and they didn’t realize the implications or just hoped it would turn out alright anyway.

The Black Box

For many, taxes are like a black box - like a WW2 enigma machine - the inner workings of which are impossible to figure out and the outcomes always unpredictable. Hand over all the numbers, hold your breath, and hope you get lucky. The process feels like a gamble, where the push of a button decides the fate of your finances (and that vacation you were hoping to take?). Refund or liability? It could go either way. But one thing is for sure - you don’t know why or what you can do about it!

This frustration is mirrored on this side of the table as well. We try to illuminate the tax implications of decisions beforehand, but eyes glaze over. The offer for comprehensive tax planning ahead of time or implementing certain tax strategies when filing the tax returns is often declined.

I’ve heard it all

• “Too confusing…”

• “I’ll just pay it and move on…”

• “I don’t think it will be that bad…”

• “I’ll hope for the best…”

This kind of fatalistic, head-in-the-sand approach to taxes helps no one - the client paying more taxes than they should or the tax accountant who becomes nothing more than a middleman between the client and the IRS agent.

But this approach is the norm for the tax industry.

A Better Way

That’s why I’m aiming to do things differently than the norm in the tax and accounting industry. And this is what my writing here on Cultivate CFO is all about. I’m trying to peel back the layers of the complexities of taxes and share real strategies that you can use to save money on your taxes.

We made a policy last year not to bring on any more tax clients who did not want to do tax planning.

1. First, because the old way is crowded. Any old tax accountant can plug in numbers on forms and tell you the bad news.

2. Second, I love the challenge! It takes creativity, design, planning, expertise, deep understanding, and ingenious problem solving to reframe someone’s financial situation and implement tax strategies and open up wealth-building opportunities for business owners and investors.

3. Third, the government is the one footing the bill! My fees are a fraction of the savings, so everyone walks away happy!

4. Fourth, this is big-impact work. We are regularly saving between $25k-$1M in taxes - that moves the needle for most people in a big way!

5. Fifth, I don’t have any of these conversations with my clients where they are devastated by their tax liability. Instead, I get thank you emails and excited discussions about future wealth-building projects.

Key Takeaways

The annual journey through tax season should not be one of passive resignation. Instead, I want you to consider these principles today:

1. Don’t disengage and opt for the simplest path forward. Taxes are complicated and details are important, but it’s not impossible to learn enough to make a big difference in your liability.

2. Find a good tax accountant who will have real tax planning discussions with you. Not just planning to pay your huge liability, but finding real strategies to reduce your liability. (By the way, this article is not an appeal for more clients - we are at capacity right now!)

3. Ask questions! Ask about the implications of your financial decisions and options to reduce your liability. Ask why - then why again, and again, until you get an answer that you understand and a tax bill you are happy with!

4. It’s your money - you earned it - take the final step by keeping the government from taking it from you.

If you engage and are proactive with your taxes, you will put money in your pocket each tax season and lay the groundwork for stewardship and growth of your wealth and a secure future. Whether you figure this out this tax season or commit to this going forward, refuse to accept that taxes are something you can’t avoid.

What do you think? How do you deal with the complex tax issues you don’t understand?

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Questions or further thoughts? Feel free to drop them in the comments and we can dive deeper!

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Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

I talked with a client the other day about a common question I receive:

The answer saved him over $30k in taxes on only $200k in income.

Our conversation went on for the better part of an hour as we discussed the pros and cons of each, but the right answer to this question was pretty obvious for him after just a few minutes.

I’ve condensed the most valuable and relevant parts of this discussion so that you can make the best choice for your situation and (hopefully) save a good chunk in taxes.

Consideration #1: What Does the IRS say?

• We discussed the legal classification for W2 vs 1099 and why sometimes you simply aren’t given a choice. See the IRS guidelines here for more information.

• The Department of Labor has just issued new guidance which is under scrutiny in the courts right now. Their guidelines are more stringent than previous rulings, but is still helpful to understand. You can find more information here.

Consideration #2: Taxed on Gross or Net Income?

• W2 employees earn wages, pay taxes, then pay expenses with the money leftover.

• 1099 contractors earn wages, pay expenses, then pay tax on what is left over.

• This difference in timing and calculation of taxable income is the single greatest factor that results in 1099 contractors paying far less in taxes than their W2 counterparts.

• Believe it or not, the savings aren’t just for the individual, but also for the company paying that individual as they are no longer on the hook for Employer taxes of 8-10% or more. This means that you may even be paid more because they have more available to cover your cost!

Consideration #3: Tax Strategies

• W2 employees have very few tax strategies they can take advantage of besides retirement contributions and tax-free health coverage.

• 1099 Contractors unlock hundreds of tax strategies including deducting a variety of expenses, depreciation benefits, self-managed retirement, Augusta Rule rental deductions, home office, travel (think Hawaii for annual business meetings), S Corporation SE tax savings, etc.

Consideration #4: Complexity

• W2 is the simplest way to go… but simple doesn’t mean cheap. It costs you in taxes. W2 employees can usually file with H&R Block or Turbotax.

• 1099 is more complicated. You have to:

  • Start a business

  • Learn about tax filings

  • Learn how to manage your business finances

  • Learn about what you can and can’t expense

  • Most likely need to hire a tax accountant to help with their personal and business return filings

• As with anything in life, you get out what you invest in. The ROI on this learning can be significant and compounds every year.

Consideration #5: Benefits

• W2 employees get benefits like health insurance, retirement, vacation, sick pay, etc.

• 1099 Contractors get benefits like autonomy, flexibility, ability to work with multiple clients, self-managed retirement, etc.

I’ve had many similar conversations over the years and have had clients choose both options based on what best suited them.

What do you think? Have you made this choice? How did it turn out for you?

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Do you know anyone trying to make this decision? Please share so that others can learn how to be more strategic with managing their tax preparation.

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Questions or further thoughts? Feel free to drop them in the comments and we can dive deeper!

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Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

💡 Key Takeaways - Tl;dr:

• Tax Prep is Hard: It’s Complicated, Time-consuming, Errors and Mistakes are Expensive, Tax Bills are High, and Audits are Intimidating and Expensive

• A Tax Accountant Should: Save you Time, Money, Stress, and help you Avoid IRS Audits

• Step 1: Determine Whether You Need a Tax Accountant. How complex is your situation? Do you understand your taxes? How much work do you have? Do you have any “special” tax situations?

• Step 2: How to Find a Qualified Tax Accountant. Ask for Referrals, check the IRS Directory, Google, and Reviews.

• Step 3: Vetting your Tax Accountant. Once you’ve found one, vet them to understand their Expertise, Services, Experience, Capacity, Fees, Tax Planning, License, Insurance, Representation, Communication, & Technology.

• Step 4: Building a Relationship with Your Tax Accountant. Ensure Honesty and Transparency, Ask for Advice when needed, and Share your Goals and Plans.

• Step 5: Prepare for Your Tax Engagement. Save Time & Money by Preparing your Tax Documents for your Tax Accountant with Checklists and Organizers.

• Step 6: Understand Important Deadlines. Understand your Filing Deadlines and ensure your Tax Accountant has enough Information and Time to File Returns.

• Tax Organizers and Preparation Checklists for working with your Tax Accountant for Personal & Business Tax Preparation

My central assumption in this guide: you want to optimize your earnings, minimize taxes, and simplify tax filing to reduce IRS stress as much as possible.

This article is one among many in my tax planning series that aims to help you do just that.

Why is Tax Preparation so Challenging?

Have you ever asked yourself that question? I ask it… every year at tax time… and I’ve been doing this for well over a decade now.

Here’s the problem as I see it:

• Tax Prep is Daunting. It requires a highly specialized skillset that most lack and wouldn’t benefit from learning if they wanted to.

• Taxes are Overly Complicated. Think about all the chaos in Washington, then imagine distilling that mess into an interconnected web of laws and regulations and then untangle what that mess means to your tax liability.

• Learning all the Regulations takes too much Time. Your time is better spent elsewhere making money and bringing value in your area of expertise. The reality is that doing it yourself often costs more in errors and time than it saves.

• Errors are Costly. Not only do you get penalties and interest, but if you file incorrectly, you may invalidate a tax strategy and tax savings. Incorrectly filed tax returns are also difficult and expensive to amend.

• Taxes are Expensive. One of the biggest expenses in your business and life is your tax bill. Not knowing how to file correctly will likely compound what you owe in taxes.

• Tax Audits Suck. The fear of an IRS audit ranks up there with the fear of a terminal disease diagnosis. Going through an audit is stressful and costly in advisor fees and tax bills in bringing about a resolution.

• Tax Accountants Can’t Do it All. Even if you work with a Tax Accountant, you still have to gather your documents and provide accurate information… you can’t get out of this work!

• Misconception about Tax Accountants and Tax Savings. Keep in mind, not all tax preparers do tax planning, and when you pay for tax preparation, you are not paying for tax planning. If you have done tax planning, it is essential that your Tax Accountant understands your tax planning strategies and is able to implement them effectively.

That all sounds miserable, but this article is my guide to help you through to successfully file your tax returns with as little stress as possible.

Why Trust Me?

As a licensed CPA with over a decade of experience handling a broad range of tax returns. My firm has hundreds of clients ranging from simple 1040’s to complex Partnership and Corporation returns.

We are right now getting into the swing of tax season, meeting with our clients to help them prepare their tax filings.

As you are needing to prepare for your tax return filings, I want to guide you through our process. I’ll provide you tools and checklists to work successfully with your Tax Accountant this tax season.

Your goals in partnering with a qualified Tax Accountant or CPA should be to:

• Save time - so you can focus on building your business and making money.

• Save money - save on taxes and avoid costly errors.

• Save Stress - avoid having to delve into the complexities of the tax code yourself and let someone else do it faster and more accurately.

• Avoid IRS Audits - don’t set yourself for unnecessary IRS notices and audits by making mistakes, and partner with an expert for representation if needed.

In this article, I’m going to help you complete the following steps for a successful tax season:

• Step 1: Determine Whether You Need a Tax Accountant

• Step 2: Find a Qualified Tax Accountant

• Paid Subscribers: Step 3: Vet your Tax Accountant

• Paid Subscribers: Step 4: Build a Relationship with Your Tax Accountant

• Paid Subscribers: Step 5: Prepare for Your Tax Engagement.

• Paid Subscribers: Step 6: Understand Important Deadlines

• Paid Subscribers: Prepare using Tax Prep Checklists and Organizers

Step 1: Determine Whether You Need a Tax Accountant

Answer these 4 questions to determine if you even need a Tax Accountant, or whether you should self-file with software or bring to a fast-file company.

How complex is your situation?

There have been times when I have advised potential clients with simple filings that they will be better served by TurboTax or H&R Block than by my firm. The truth is their situation is simple and there isn’t much I can do to offer value to them. My fees will be too high and my CPA skillset is not necessary and can’t be leveraged to save them money on their taxes. On the other hand, if you have multiple schedules or a Partnership, S Corporation, or C Corporation tax return, I’d recommend engaging a Tax Accountant.

Ask yourself the following questions:

• How many tax forms have you received?

• Do you know how to process each of them?

How well do you understand your taxes?

If your returns are simple, and if you are familiar with your tax returns and have a good grasp on what is required, you may be better off filing your own returns.

When you review your prior year tax returns, can you tell if they are correct or not?

If your understanding is limited or if you have received a tax form you aren’t familiar with, you are better to engage a Tax Accountant. At the same time, have them walk you through the returns when they are complete so you can build your knowledge - it will serve you well in the future!

How much tax work do you have?

The amount of tax work you have to do is based on the complexity of your situation. If you have more than a 1040 and a few schedules, this can become overwhelming with the details involved in preparing and linking the tax forms.

Tax software can certainly help, but without a deeper knowledge of these forms, it can be difficult to verify that everything has been prepared correctly.

Do you have any of the following special situations?

If you have the following situations, engaging a Tax Accountant is a good idea:

• Schedule C Self Employment Income

• Schedule E Rental Property Income

• Schedule F Farm Income

• Complex Investment or Royalty Income

• Foreign Income, Assets, and Bank Accounts

• Asset Sale with Capital Gains or Losses

• Real Estate Transactions

• Early Retirement Distributions

• Cryptocurrency Transactions

• Tax Credits

• Complex K-1s

• Charitable Contributions of Property

• Stock Options or Equity Compensation

• Debt Forgiveness

• Natural Disaster Losses

• Multiple State Filings

• IRS Audit, Notices, Back Taxes, or Debt Resolution

• Amending Prior Year Returns

• Major Life Changes like Marriage, Divorce, or Death

• Business Tax Returns - 1065, 1120S, 1120

• Inheritance, Gift, and Estate Taxes

Ok, let’s assume you made it through this list and your answer is, “Yes, I need a Tax Accountant.” The next step is finding one.

Step 2: How to Find a Qualified Tax Accountant

Before diving into how to find a Tax Accountant, it's crucial to understand the reality that anyone can call themselves a tax preparer without specific qualifications. This lack or regulation led to the IRS to attempt to enforce qualification requirements back in 2011, which was ultimately struck down in court (more on this debacle).

Despite this setback, the IRS hasn’t been shy about warning against those they consider to be unqualified. Every year they release what they call the “Dirty Dozen” to warn against “unscrupulous tax return preparers.” They warn that “shady tax preparers” may:

• Refuse to sign the tax return or ask people to sign a blank return.

• Charge a fee based on the size of the refund.

• Ask for a cash only payment without providing a receipt.

• Invent false income to try to get their clients more tax credits.

• Claim fake deductions to boost the size of the refund.

• Direct refunds into their bank account, not the taxpayer's account.

A Revealing Customer Support Call

A few tax seasons ago, I had an enlightening conversation with a lead customer support manager at a well known tax software company about tax preparer qualifications. I called in to resolve a problem with a specific tax form not populating correctly, which they were able to promptly address.

However, the conversation then took an unexpected turn when I asked him about the kinds of support calls they receive from other tax preparers.

His answer was both surprising and unsettling. The majority of tax preparers who called in weren’t actually struggling with the software at all. Instead, they called in because they had no idea how to file the correct forms for their clients’ specific situations. Despite being tax preparers and presenting to the public as tax experts, they often sought tax advice from his customer support team, who was not equipped or able to provide it.

The insight here is clear: Many unlicensed tax preparers lack sufficient knowledge, training, and problem-solving skills to correctly file more than the simplest of tax returns. This is an area where you need an expert.

How do you find a Qualified Tax Accountant?

I’ll start with some advice direct from the IRS. The IRS provides a pretty good guide to help you Understand Credentials for Tax Preparers. Here’s the breakdown of the three credentials they recommend for a qualified Tax Accountant:

• Enrolled Agent (EA): Licensed by the IRS. They take a 3-part exam focused solely on tax. The have continuing education requirements and can represent you before the IRS.

• Certified Public Accountant (CPA): Licensed by State Boards. Professionally trained in accounting, finance, taxation, business, and audits. Stringent education, experience, and continuing education requirements. Able to represent before the IRS.

• Tax Attorney - Professionally trained attorney who specializes in tax law. Able to provide legal advice and represent taxpayers in civil and criminal tax court before the IRS.

Strategies for Finding the Right Tax Accountant

Here are the steps that I would recommend you take to find a qualified Tax Accountant:

1. Referral - Seek recommendations from a trusted professional like your Financial Advisor, Wealth Advisor, Lawyer, or other business owners.

2. IRS - Use the IRS’s Directory of Federal Tax Return Preparers with Credentials and Select Qualifications to find preparers with PTINs and IRS-recognized professional credentials.

3. Local Search - Google CPAs in your area if you want someone local. Keep in mind that most Tax Preparers work fully online, so you can often choose a Tax Accountant anywhere in the country as long as they are familiar with your State and Local tax filing requirements.

4. Check Reviews - Review both positive and negative reviews to determine quality and reliability of potential accountants.

Once you’ve found who you think is a good Tax Accountant, it’s important to also vet them to make sure they are legitimate and confirm that they are the best fit for your situation.

Paid Subscribers will get the following below:

• Step 3: Vetting your Tax Accountant

• Step 4: Build a Relationship with Your Tax Accountant

• Step 5: Prepare for Your Tax Engagement

• Step 6: Understand Important Deadlines

• Tax Preparation Checklists

• Tax Preparation Organizers

Cultivate CFO is a reader-supported publication. To receive new posts and support my work, consider becoming a free or paid subscriber.

Subscribe now

Questions or further thoughts? Feel free to drop them in the comments and we can dive deeper!

Leave a comment

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Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, like all my resources, is intended solely for educational purposes and should not substitute for specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

💡 Key Takeaways - Tl;dr:

• Understand the Government’s Goals: Tax savings come with understanding the objectives behind the laws and bringing investments into alignment.

• Politician’s Greatest Power: the ability to Tax the Population.

• Main Goals of the Government: Economic Growth and Stability, Promoting Social Welfare, and National Security.

• Become an Active Partner with the Government through: Business, Research & Development, Real Estate, Energy, Agriculture, Insurance, and Retirement & Estate

Imagine with me a world where every April 15th doesn’t come with resigning to the inevitable loss as your tax payment drains your hard-earned cash, but instead, with the anticipation of a chess grandmaster confidently setting up the winning move.

This article, the second in our Tax Planning Series, isn't merely a discussion on tax planning strategies; it's an invitation to a new way of thinking about taxes. This series seeks to educate Business Owners and Investors on how to develop an effective Tax Planning Strategy to support their Wealth-Building Goals.

The following is for those who are seeking to build their wealth and grow a business, but hate being set back by the big IRS check that goes out the door every year.

Approaching tax planning is like playing chess. Each move you make, whether it's a strategic investment or a well-timed deduction, is like moving your pieces into position to protect your king and take ground. Learning effective strategies and anticipating your opponents moves takes time, but will lead to you consistently winning the game.

This article is for those who have been trying to figure out the rules of the tax game and how to develop a consistent winning strategy.

In this article, I’m going to help you understand:

• The Government’s Goals with Tax Law

• How the Government wants to Partner with Business Owners and Investors like you to accomplish their goals

• 7 areas of strategic alignment you can leverage for tax savings

My Journey into Tax Planning

When I first found myself immersed in tax return preparation as a young tax accountant, I would have clients coming to me after I had prepared their tax returns, asking me what they could to lower their tax liability. I had been excited about how I had polished off all my hard work on their tax returns and was feeling quite good about my work, but they didn’t seem to care about their nice neat and technically correct tax returns - they expected that.

👉🏻 All they were focused on was the big tax liability check they had to write - and rightly so!

The problem was, I didn’t have any answers for their questions that really made a big dent in their liability, nor did I find any answers in the materials from all the college courses I had taken or the tax preparation books and guides I had on my shelf.

But I knew that someone had figured this problem out for the wealthy… I just had to find a way to learn what they knew.

Think Like a Billionaire’s Tax Accountant

What do all of the following have in common?

If you guessed that they were billionaires, you’d be right. But what I think about when I see these men is that they all pay a lower percentage of tax on their income than you and me.

When I was out of ideas and tax planning resources, I would often ponder my client’s situation and imagine some wealthy billionaire’s lawyers and accountants working up some recommended law or loophole. These experts would draft everything up and find someone to lobby a congressman to push it through into law. All so they could get out of paying tax and grow and keep their wealth.

These accountants and lawyers would have to create a win-win solution that allows their billionaire bosses to save on taxes while also enabling the congressman to demonstrate how their suggested law benefits the government and the population at large..

*Congresspersons are too busy raising campaign money to read the laws they pass. The laws are written by staff tax nerds who can put pretty much any wording they want in there.”

- Dave Barry, Author & Columnist

I thought about business, real estate, investments, and estate taxes and would imagine what I would do in the same situation. What law would I propose that would align the billionaire’s goals with the governments, or vice versa?

I would then go and search for these ideas in the IRS tax code and through Google searches to see if I could find a tax strategy or law that did what I was thinking. More often than not, I would stumble upon some variation of these ideas and laws and discover tax planning strategies for my clients.

Many years have passed and I have developed a much more comprehensive view of the tax code, but the principles of tax planning remain the same.

👉🏻 If we want to find tax savings, we should seek to understand why the laws have been written the way they have, and how we can align with those laws to gain the associated tax savings.

How Politicians Think about Tax

What is the greatest power that a politician has?

• Wage war?

• Change laws?

• Influence society?

• Control and guide the nation toward some ideal state?

I think all of those are strong powers, but there is something greater that both facilitates and empowers these.

The greatest power that a politician has is the ability to tax the population.

Through taxation, the politician has the ability to influence certain activities, to control and guide the people and so the nation, to wage economic war against other countries and to raise money to fight wars. Taxation is a powerful force that exerts pressure at every level of society.

Politicians on both sides of the aisle understand this and seek to wield this power to accomplish their goals. This is the very reason that the tax burden on society has only continued to grow.

The Government’s Goals with Tax Law

The only difference between death and taxes is that death doesn't get worse every time Congress meets.
- Will Rogers, American Humorist & Entertainer

When we see that politicians use the tax law to wield power, we then need to ask how they use that power to accomplish their goals.

Here is the secret:

The government needs the partnership of its citizens to accomplish its goals, utilizing an elaborate system of incentives and penalties known as the tax law and IRS tax code to encourage participation.

This partnership between government and taxpayer is like a dance. The government leads with its laws and incentives, often stepping on toes to begin with, but then getting the rhythm set. Then the taxpayers respond, moving in tune to find ways to maximize wealth and minimize taxes. When both partners move in sync, the dance is smooth and everyone benefits.

The problem is, while the rich get out on the floor and learn the dance, most of us stay seated on the sidelines like insecure, pimple-faced high schoolers afraid of making a mistake or looking stupid.

The rich understand that investing their money in ways that synchronize with the government’s incentives makes them richer by building their wealth and paying less in taxes.

The real question you should ask yourself is how long you’ll stay on the sidelines letting your wealth diminish one tax bill after another?

If you want the incentives (tax savings) and to avoid the penalties (crazy high taxes), you need to know what the government’s goals are and how you can align your personal wealth growth goals with them.

Goals of the Government

What does the Government want? What do Politicians want?

• Tax Dollars?

• More Money?

• Political Control?

• Funding for their special programs?

• Appease special interest groups, donors, and lobbyists?

• Re-election?

Without discounting any of the above, I believe those are all too small of a focus. Beyond all of these superficial issues, there is what I believe the Government and Politicians are really after and held responsible for. Underneath the complex web of laws and tax codes are the following ambitions:

Certainly without a focus on these things, no politician is going to last very long as the population will quickly turn on them and vote them out.

On a more practical level, how does the Government accomplish these goals? They provide for the above through:

• Food

• Shelter

• Protection

• Education

• Peace

Same Goal, Different Paths

While I’m happy to stay out of the muddy waters of politics, we can’t avoid or ignore the political influence on taxation. The Left (Democrats) and the Right (Republicans) have different approaches, but common goals I discussed above of Economic Growth and Stability, Promoting Social Welfare, and National Security:

1. Tax Policies for Economic Growth:

   • Left: Active Government Role, Higher Taxes for the Rich, and Wealth Distribution for Equality, Social Welfare, and Funding of Services.

   • Right: Smaller Government, Lower Taxes, Free Market, & Deregulation for Economic Growth, Jobs, and Greater Societal Wealth

2. Corporate & Investment Taxation:

   • Left: Promotes Higher Taxes Similar to Wages for Fairness and to Contribute to Societal Welfare.

   • Right: Seeks to Lower Taxes to Encourage Investment Growth, Stronger Economy, International Competitiveness and National Security.

3. Societal Wealth Distribution:

   • Left: Supports Estate Taxes to Reduce Wealth Concentration and Promote Equal Opportunity.

   • Right: Opposes High Estate Taxes to support Family Businesses and Sustained Growth in the Economy.

4. Government Budgets and Investment:

   • Left: Accepts Higher Deficits for Infrastructure Investments for Social Welfare and Economic Stability.

   • Right: Wants Reduced Deficits and Balanced Budgets for Economic Stability and Growth and National Security.

Tax Policies: Joe Biden vs Donald Trump

How does this play out in practical terms? How do the policies of politicians seek to establish economic growth and stability, social welfare, and national security?

We can look at the tax policies of Joe Biden and Donald Trump as examples of how politicians use tax to wield power. There is a stark difference between these two views, as is often the case between Republicans and Democrats, in terms of their goals and what they view as most beneficial for the nation and its citizens. This results in differences in what areas of the tax code are emphasized and what incentives are unlocked.

Donald Trump implemented the 2017 Tax Cuts and Jobs Act (TCJA) which were the most substantial changes to the tax code since the 1980s.

Trump’s focus with his tax initiatives were around stimulating economic growth and securing the nation’s competitive advantage on the world stage.

Some of the key features of the TCJA were:

• Cutting the Corporate Income Tax Rate from 35% to 21%. This made US companies more competitive in the global marketplace as the 35% rates were among the highest in the world. Reducing corporate income tax benefits workers as new investments boost productivity and lead to wage and job growth. See more on these benefits in this article: https://taxfoundation.org/research/all/federal/benefits-of-a-corporate-tax-cut/

• Move from a worldwide tax system toward a territorial system of corporate taxation. A territorial tax system taxes income based on the country of its source, with exemptions for foreign-earned income and no additional tax on repatriated earnings. At the same time, the TCJA reduced the risk of tax avoidance in lower-taxed regions. This helped repatriate earnings and wealth back to the US. https://taxfoundation.org/taxedu/glossary/territorial-taxation/

• Pro-growth tax plan. Through provisions like the Qualified Business Income (QBI) deduction (which allows a 20% deduction for eligible small business owners), 100% Bonus Depreciation (to deduct larger assets fully in the year purchased), and Qualified Opportunity Zones (investment zones with tax benefits), the TCJA sought to stimulate economic growth. The initial analysis indicated that the TCJA “would spur an additional $1 trillion in federal revenues from economic growth.” Over a decade, the TCJA “would increase GDP by an average of 0.29% per year.” This will also lead to “1.5% higher wages, and an additional 339,000 full-time equivalent jobs.” https://taxfoundation.org/research/all/federal/final-tax-cuts-and-jobs-act-details-analysis/ https://www.irs.gov/newsroom/tax-cuts-and-jobs-act-a-comparison-for-businesses

• Trade Agreements. Trump removed the US from the Trans Pacific Partnership, renegotiated the North American Free Trade Agreement, and engaged in trade conflicts with China. He attempted to create trade deals that supported American companies and workers.

In contrast, Joe Biden’s proposed tax plan in 2020 sought to make the following changes to the tax code.

Biden’s tax plans were primarily focused expanding healthcare and social programs and funding energy initiatives focused on reducing climate change.

• Raising the Corporate Tax Rate from 21% to 28% (attempted but did not pass) as well as a 15% minimum tax on all revenue reported to investors for corporations regardless of tax breaks or loopholes (passed with the Inflation Reduction Act).

• Raise Long-Term Capital Gains Tax to Ordinary Income. This would raise the top capital gains rate for those making more than $1M from 20% to 39.6%.

• Rejoining Trade Agreements. Biden has sought to rejoin the Trans Pacific Partnership and loosened economic restrictions on China.

• Lower Energy Costs. The Inflation Reduction Act would provide credits and tax cuts to invest in green energy, carbon emissions reduction, climate change solutions

• Affordable Healthcare Costs. The Inflation Reduction Act lowers prescription drug prices and healthcare costs.

• https://www.mhmcpa.com/insights/article/comparing-the-trump-and-biden-tax-plans

• https://smartasset.com/taxes/joe-bidens-tax-plan-explained

Even though these two Presidents focused on different programs and incentives, you can see that both plans still fell within the same general categories discussed above. Though they are going about it differently, they are each still seeking to stimulate economic growth, promote social welfare, and increase national security.

The strategic business owner and investor will keep up with recent tax law changes and discover new ways to align their investments to maximize their savings and grow their wealth.

Paid Subscribers will get the following below:

• How the Government seeks Partnership with Businesses and Investors to accomplish their goals

• Curated video of Tom Wheelwright explaining the mindset behind tax planning

• The 7 Best Investments for Tax Savings

• How to Use the Tax Code to Build Wealth

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💡 Key Takeaways, TL;DR:

• Tax Preparation is not Tax Planning

• Most Tax Accountants have never learned, and don’t perform Tax Planning

• Tax Planning is the process of evaluating your current income, assets, and life situation along with your wealth building goals, future income, retirement, and estate plans, to prepare a strategic plan that will accelerate wealth creation and result in the lowest tax liability.

• Your most expensive bill at tax time is your tax bill, not your advisor’s fees.

• Good tax planning won’t get you audited.

• Tax evasion is illegal, but tax avoidance is encouraged.

Disclaimer: My goal in these articles is to simplify the complex and help you take the next step in your financial situation. As such, this is not a comprehensive deep dive into every possible nuance or strategy. This article, as with all my resources, are for educational purposes only, and are not to be used as specific investment, financial, or tax advice. Always consult a qualified tax professional for guidance about your tax situation.

This article is the first in our Tax Planning Series where I seek to educate Business Owners and Investors on how to develop an effective Tax Planning Strategy to support their Wealth-Building Goals.

I am writing this article for business owners and investors who are frustrated with the amount of tax they owe (or will owe) and want to know what they can do about it.

It is for those who are seeking to build their wealth and grow a business, but hate being set back by the big IRS check that goes out the door every year.

This article is for those who have been working with a CPA or Tax Accountant, but aren’t seeing their work make a big difference in their tax bill.

In this article, I’m going to help you understand:

• What Tax Planning is, and why it’s important

• Why Tax Planning is different from Tax Preparation, and

• Why you need to engage in Tax Planning if you want to Build your Business and Grow your Wealth.

Paid subscribers will also get access to:

• 5 Steps to Lower Your Tax Liability

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Confusion Around Tax Planning vs Tax Preparation

First Big Misunderstanding: Your Tax Preparer is both preparing your tax returns and saving you money on your taxes with Tax Planning.

“I paid a CPA to do my taxes. Didn’t they make sure I owed the lowest tax liability?”

Many business owners have the impression that if they advance beyond TurboTax or H&R Block and hire a tax accountant or a CPA that they will be getting better tax advising that will help them save money on taxes, but this is rarely the case.

Second Big Misunderstanding: People mistake Tax Planning for Planning to Pay their Tax Liability.

“I’ve done tax planning - my accountant helps me plan my estimated tax payments.”

🤦🏻 So wrong…

I’ve written this article to clarify the differences between tax planning and tax preparation and to show you how powerful good tax planning can be in achieving your financial and wealth creation goals.

Why Doesn’t My Tax Accountant do Tax Planning?

1. Education

The reason that you don’t get tax planning when you go to a tax accountant or CPA is simply because the education they receive is focused on tax compliance, not tax planning. Tax compliance is the first step for an accountant entering into the field, and is pretty easy to understand, even if it takes a while to learn all the details of the tax code.

2. Traditional Focus

Most tax firms focus on tax preparation and IRS compliance - that’s all. Tax preparation workload for most firms is high so that they can make a decent profit. But this also means that they aren’t incentivized to go deeper than simply preparing the return to help you save on taxes.

3. Right Brain vs Left Brain

When you think of your tax accountant, which of the following comes to mind?

• Left Brain: Logic, Analytical Thinking, Math, Sense of Time

• Right Brain: Creativity, Intuition, Imagination, Holistic Thinking

Tax Preparation relies heavily on logic, analytical thinking, and math skills.

Tax Planning relies on divergent thinking, creativity, imagination, and creating a variety of potential futures for strategic wealth planning.

A lot of accountants I know struggle to transition their mindset from compliance to creative to really succeed in tax planning for their clients.

This was my experience for the first half of my career as a CPA - my Masters in Accounting and Financial Management and all the professional training and work focus was all on tax compliance. I had to take the initiative to dig deep and learn tax strategies and planning options for my clients.

Don’t get me wrong!

I don’t mean to take away from the significant value of accurate tax preparation and compliance work. The reality is that it is quite challenging work that takes a robust knowledge of the tax code. Filing your returns accurately is important and keeps you out of audit trouble with the IRS.

But apart from keeping you out of an audit, getting correct tax returns filed doesn’t actually bring much value to you as the taxpayer because you are still on the hook for the bill!

Just because you have a compliant and correct tax return that will pass an audit, doesn’t mean you are paying the least amount of tax you legally owe.

The reality is, the vast majority of business owners overpay in taxes while filing “correct” tax returns. We see this often with business owners coming to us that they are often overpaying by 20%-50% or more on their taxes.

What is Tax Planning?

Tax Planning and Tax Preparation are very different activities requiring different mindsets and skillsets with different end goals.

A Tax Advisor is less focused on the left-brain compliance focus of getting everything neatly fitting in the right boxes, that comes later. Rather, the Tax Advisor is focused on the right-brain, creative activity of discovering new opportunities, repositioning facts and circumstances, finding areas of alignment between wealth creation and the tax incentives, and creating solutions.

Instead of starting with the end result of the tax preparation where you might owe $175,000 and thinking about reducing that number, the Tax Advisor begins at $0 and deliberately adds back only the taxable income and liability that increases wealth only after all other strategies have been exhausted.

Tax Planning Definition

Tax Planning is the process of:

• Evaluating your current income, assets, and life situation,

• Along with your wealth building goals, future income, retirement, and estate plans,

• To prepare a strategic plan that will

• Accelerate wealth creation and

• Result in the lowest tax liability.

Tax planning begins with the realization that the tax law and IRS Code is written with less than 0.5% focused on what income is taxable, and 99.5% on ways to reduce your tax liability. The tax code is mostly written as a series of incentives for business owners and investors to reduce their tax liability. In other words, the government wants you to do certain things with your money and will incentivize you or penalize you depending on what you do with your money.

This leads to the second focus: everything you do with your money either increases or decreases your tax liability.

• Do you want to invest your earnings into growing your business? Buying or developing real estate? Investing in energy? Then the government will reward you by lowering your taxes.

• Do you want to save your money in the bank? Do you want to spend your money on toys and boats and entertainment? The government will penalize you by making you pay more taxes.

When we engage with business owners on tax planning, we focus first on how they are building wealth and what their goals are. We then focus on arranging and positioning the facts and circumstances of their life, income, business, and investments in a way that aligns both with their wealth-building goals and with the tax savings we can unlock

Ultimately, tax planning is about ensuring that you don’t pay more taxes than you legally owe. It is your money, not the government’s. You earned it and you have the right to keep it.

Tax Planning vs Tax Preparation

Engaging in tax planning is about becoming an active participant with the government rather than a passive spectator.

While many of the tax laws we have today began taxing those with the ability to pay (the rich), the rich adapted, challenged and fought back to maintain their wealth. Over time, the taxes crept up on the lower and middle classes who had fewer resources and less expertise to fight back effectively. What we have now is the taxation of the passive majority who complain and grumble but ultimately cower in fear and pay the money.

What is Your Most Expensive Bill?

I’d like to put Tax Planning into another perspective for you by asking you this question:

What is your most expensive bill at tax time?

1. Your Tax Accountant’s Bill

2. Your IRS Tax Liability Bill

Here is where most people get it wrong:

❌ Most people haggle over their tax preparation bill and yet pay their IRS tax bill without question.

✅ What they should focus on is challenging and lowering the IRS tax bill by investing good money on the best Tax Advisors and Tax Planning.

We see this all the time. People call us up and ask for our tax preparation fee and tell us that H&R Block or another tax preparation firm in our area charges less than we do. We don’t argue that our fees are higher, but I ask them how much their tax liability was. Here is a common example:

• Tax Prep Fee: $2,000

• Tax Liability: $125,000

• Total: $127,000

Now if they had done some tax planning and tax preparation with us, they would have a higher fee, but that is dwarfed by the savings:

• Tax Planning, Implementation, and Tax Prep Fees: $13,500

• Tax Liability: $75,000

• Total: $88,500

That’s a difference of $38,500 in real money out the door! Sure, this is an example, and your situation is undoubtedly different, but this isn’t an unusual situation.

Here are some real-life numbers of tax savings that we have delivered for clients:

Will Tax Planning Get Me Audited like Al Capone?

After I explain tax planning to a business owner and they are ready to move forward, a common question I get in response is, “What if I get audited?”

This question is based on the false assumption that somehow tax planning is against the law and if you get caught, you’ll get in trouble.

Many people misunderstand tax planning as finding a backdoor loophole that, if found out, will land them in hot water with the IRS. They have some fanciful idea that they are going to end up like Al Capone and get in trouble with the IRS for tax evasion.

“They can’t collect legal taxes from illegal money.” - Al Capone

Unfortunately, that approach didn’t fly for him in court. If only Al Capone had an accountant who did good tax planning!

“[g]ains from illicit traffic in liquor are subject to the income tax would be taxable.” U.S. v. Sullivan, 1927

I’ve curated a fun video where I share that Al Capone was actually a great tax strategist - what caught him wasn’t his tax planning, but his illegal operations and tax evasion.

Fun history aside, high-profile cases like Al Capone’s have given rise to confusion and unwarranted assumptions about tax planning strategies. The reality is that this assumption that tax plans are illegal and will get you into trouble is based on a false understanding about the difference between tax avoidance and tax evasion.

Tax Avoidance vs Tax Evasion

What many people don’t understand is that the main difference between tax avoidance and tax evasion (for those of us who aren’t criminally-inclined like Al Capone here) is simply a matter of timing, framing, and intent.

❌ Tax evasion is breaking the law to reduce your tax liability and typically involves failing to report taxable income or reclassifying or reducing income through reporting false deductions that didn’t actually occur.

✅ Tax avoidance on the other hand is a legal and appropriate arranging of the financial facts and circumstances in order to minimize tax liability within the law.

If you plan ahead and arrange your life and business and finances to reduce your tax liability, you are practicing tax avoidance. If you come in after the fact and make up facts and circumstances and intent that didn’t actually take place, you are entering into tax evasion.

The established legal precedent that both expects and encourages tax avoidance through good tax planning comes from the Federal Appellate Judge Learned Hand in the following two cases.

Appellate Judge Learned Hand is famous for the following quotes from his court decisions:

How to Get Started with Tax Planning

This article is in a series of articles that are focused on educating you, the business owner and investor, in building and protecting your wealth through tax planning. I can’t fit everything you need to know about tax planning in one article, but here is a list of the other articles in this series:

👉🏻 What the Government Really Wants from You

👉🏻 The Big Picture of Tax Planning Strategy

👉🏻 Tax Planning Secrets of the Ultra-Rich

👉🏻 Advanced Tax Planning Strategies

👉🏻 How to Choose a Tax Advisor

But before you jump into those other articles, I want to close out this article with some clear next steps for paid subscribers on how to get started with tax planning.

Paid subscribers will also get access to:

• 5 Steps to Lower Your Tax Liability

Did you like this article? Please share so that others can learn how to be more strategic with managing their tax liability.

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- What was your favorite part of the newsletter?
- What strategies are you looking to implement for yourself?
- What would you love to learn more about?

Feel free to drop them in the comments and we can dive deeper!

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