Why Smart Entrepreneurs Never Pay 'Full Price' on Taxes with Adam Williams

0:01Light that spark fire nation. JLD here and welcome to Entrepreneurs on fire. The only daily show interviewing the world's top entrepreneurs seven days a week. Today, we'll be breaking down why smart entrepreneurs never pay full price on taxes. To drop these vibe bombs, I brought to Adam Williams and the EO Fire Studios. Attorney Adam co-founded Pennywise Tax Strategies with his CPA wife, Jackie, helping entrepreneurs save money on their taxes, avoid IRS headaches, and get a better grasp of their numbers. And today, we'll talk about the number one mindset shift to start paying less, the difference between write-offs, credits, and more, and also the five most commonly missed strategies that all entrepreneurs should know about and oh, so much more.

0:41And a big thank you for sponsoring today's episode goes to Adam and our sponsors. Fire Nation, this is your year to get unstuck and to grow a successful business. Attend the world's highest rated business growth workshop taught personally by Clay Clark and now featuring football star Tim Tebow and President Trump's son, Eric Trump at thrivetimeshow.com slash EOfire. Again, request life-changing tickets today at thrivetimeshow.com slash EO Fire. Are you ready for the ultimate all-in-one platform for entrepreneurs, marketers, coaches, and agencies? Build funnels, automate follow-ups, manage clients, and even white-label your own software.

1:19Say hello to our featured partner, High Level, and visit highlevelfire.com to start your free trial today. Adam, say what's up to Fire Nation and share something that you believe about becoming successful that most people disagree with. Yeah, what's up, Fire Nation? All right, so this is an interesting one, and I think it comes down to this. I don't think that good advice comes in sound bites. I think it's usually a little more complex than that. So as an example, I think a lot of people say, oh, you got to hustle, you got to work hard to be successful. And there's a little bit of truth to that.

1:57But then on the other hand, sometimes your business just runs and works for you and you don't have to work so hard. So it's a little more nuanced than the typical advice, I think. And for me on that example, it kind of comes in season. Sometimes I'm working harder than anybody should have to. And other times I'm enjoying the fruits of my labor. Fire Nation, loving how this is starting because it's going to be all about why smart entrepreneurs never pay full price on taxes. And I want to start by ripping through the five most commonly missed strategies that all entrepreneurs should know about. Yeah.

2:33So this is really good, right? I mean, it really depends on the business, but there's stuff that we see working with our clients that it seems really obvious and easy to us, but these aren't things that they're talking about with their accountants or their tax repairs. So the first one, and we always start with this because it's foundational, is just making sure you're set up in the right type of entity. If you're a sole proprietor or if you're an S corp or if you're a C corporation or a partnership with our clients, we like to review it at least annually because we work with fast growing businesses.

3:04Things change all the time and it's worth something. It's something that's worth looking into. And I think in particular, a lot of our clients come to us. Most of our clients end up getting set up as S corporations. That's like very common for small businesses. But that move in and of itself can save you so much money. So we love starting with the entity selection piece. And once your entity is set up, then you can get into like, I say it's like opening the doors to a second room of an all you can eat buffet. There's so many other options that are available. So my second favorite, and this isn't always the biggest money saver, but it is the coolest story, in my opinion, is using what's called the Augusta rule.

3:44And the idea behind this is there were people who would rent out their homes at the Augusta golf tournament and they'd spend money getting them ready, staging them, you know, marketing it. And they'd make a whole bunch of money renting this out for this golf tournament because a bunch of high income, high net worth people fly into Augusta for it. So the IRS created this rule that said, hey, if you rent your home or any dwelling for 14 days or less in a year, you don't have to report that income. So that was great for the folks who have a property that they can rent out for something like the Masters Golf Tournament.

4:20But for us mere mortals, we're able to make this work in our business because I can rent my home to my business for strategic planning meetings and shooting marketing content and team appreciation events and client events. this is money that I was going to take out of my business already, but now I can take it as a rent deduction in my business, which lowers my tax bill. So that's one of my favorite like cocktail party stories. Cause it's a, it's a cool example. It's a, it's a fun thing to know. And Oh, by the way, it can put several thousand dollars additional in your pocket every single year.

4:55So that's number two on my list. Um, I think number three for me is making sure you're taking advantage of your home office. You know, we're living in this post-COVID world where you're either working fully from home or in a hybrid setup. And there's a lot of misunderstanding out there around using your home as an office and taking a deduction for that. If you're a sole proprietor, it's a pretty easy form to fill out. But what we find is if you're an S corporation, there's a lot of accountants out there that will tell you, you can't take the home office deduction. And that's really frustrating for us because they're technically correct, but they're creatively lacking a little bit.

5:38There is a way through what's called setting up an accountable plan that your business, if you're an S corporation, can reimburse you for the business use of your home. And I mean, in our family, we have mortgage interest and insurance and repairs and maintenance and utilities and And all of these things that our business now helps pay for a chunk of. And we get we get a little aggressive with it because we include things like our housekeeper. Right. Just like we would pay somebody to to clean our office, we pay somebody to to clean our home. And a portion of that gets deducted on our taxes every single year through this this reimbursement program.

6:15So I love talking about the home office. It's you're only allowed to write off a percentage. right and the the typical formula is you say how many square feet is your office and it's a fraction of the total square footage of your home but you there's actually some gray area and how you can calculate that because you may be able to exclude things like mechanical areas and hallways and bathrooms and things like that or maybe you want to include your garage in the numerator and not in the denominator so there's some fun ways to calculate that again put a few thousand extra dollars in your pocket every single year by by not even spending any additional money.

6:51Right. These are costs that you're already incurring that you can do a lot to to reduce your tax bill. So we love the home office. And then I think getting into a little more aggressive things or maybe a little more creative or things where you have to spend some time and money to make them work. But there can be a huge return on investment. And I know that you've actually had some guests on your show talking about this. If you own investment real estate, if you own your office or rental properties or a vacation home or anything like that, and it's a business, right? You rent it out. We love doing cost segregation studies with our clients.

7:32Even if you already own the property, it may not be too late to do this. But the general rule is like, there's a lot of misunderstanding. I think a lot of people think, oh, I went out and bought a million dollar building for my business and I can write off a million dollars on my taxes this year. And the IRS doesn't agree with that. The general rule is you can you can write off property over like twenty seven and a half years. So you get to take a portion of it and deduct it every single year. But by doing a cost segregation, you split up the value of that property and some things you can write off this year, often quite a bit.

8:08or you can depreciate over five years or 10 years or 15 years instead of 27 and a half. So what this cost segregation study does is an engineer comes in and does some math and says, yep, here's the property you can depreciate faster, which can really take a huge chunk out of your tax bill this year. So we love doing cost segregation studies for anybody who has any type of real estate investment. That's a really good way to save a ton of money on your taxes compared to the home office in the Augusta. It'll save you a couple thousand dollars here and there. But these these cost segs, we love talking about them.

8:44And then I think I struggled on this because there's so many options, right? There's there's hundreds of strategies out there. But the last one that I picked, again, without trying to completely disrupt anybody's life, is just taking advantage of retirement accounts. So you get to defer the taxes if you put money into your 401k or your IRA and you'll deal with the taxes later. But it's a great way to build wealth while saving money on your taxes. So that's like an obvious one. But I know for a lot of smaller businesses out there, they haven't taken the time to set up those accounts because it's kind of a pain in the butt and can be a little bit expensive to do that.

9:23The other nice thing is, though, the federal government offers some tax credits right now. So if you spend money to create this account in your business for yourself and for your employees, you can get a dollar for dollar credit, basically a reimbursement from the government on the cost of creating those accounts. So now we're saving on our taxes. We are, we're building some wealth and, uh, and, and we love combining those two things together. But I have to tell you, this is the hardest question that you're going to ask me because we love talking about putting kids on payroll or for our really advanced clients, setting up captive insurance companies.

10:00There's just so many options. But I think those are the five that are like people miss out. If you don't have those foundational ones in place, I can guarantee you there's a whole bunch of other stuff that you need to be talking about and discussing that can be saving you big time. I mean, what's the youngest? Because Bo, my son is 17 months old. And I will say he absolutely improves engagement on my social media, which is important to my business. So what's the deal with that? I love it. I don't know the child labor laws in Puerto Rico, but that always comes into it. You know, we like any, so I'm an attorney, right?

10:34And any attorney, anytime you ask them a question, the answer is, well, it depends. And this is one of those instances where it really depends. We like to say for our clients, you know, maybe 10 or 12, depending on years old, depending on your business, because then they can actually do things and add value. But we do have clients that use their children as models. And yeah, I mean, models are pretty well compensated. And if you're using them in your social media marketing, that can be a great move. We do that with marketing vendors, with a bunch of law firms that we work with realtors. I think that's a great strategy.

11:07So in my business, our 14 year old is gainfully employed, but our seven year old is not, but it's only a matter of time until we get her involved because she's the cutest of all of us. Well, fire nation, we have many more value bombs coming as soon as we get back from thinking our sponsors. Fire Nation, this is your year to get unstuck and to grow a successful business. Are you looking to learn the proven processes and success systems that have been used to create thousands of millionaire success stories? See thousands of success stories and testimonials from real people just like you who Clay Clark has mentored and coached into prosperity at thrivetimeshow.com slash EO Fire.

11:43Clay's proven business coaching program is month to month and costs less money than hiring a minimum wage employee. Yes, it's month to month and costs less money than hiring a minimum wage employee. Schedule your free personal 13-point assessment with Clay Clark himself today at thrivetimeshow.com slash eofire. Because Clay only takes on 160 clients and only allows 300 attendees to each business conference, you will interact with Clay directly. See thousands of real success stories and learn about attending the Thrive Time Show two-day in-person workshop featuring football star Tim Tebow and President Trump's son, Eric Trump, today at thrivetimeshow.com slash EO fire.

12:18Become the next success story. Schedule a free consultation and request tickets to join football star Tim Tebow and President Trump's son, Eric Trump at Clay Clark's next business conference today at thrivetimeshow.com slash EO fire. Okay, let's talk about a platform that's completely changing how entrepreneurs are running their business. And they are also our featured partner high level. If you're an entrepreneur, coach, agency, or a course creator looking to grow faster and smarter. High Level is the all-in-one platform that replaces your entire tech stack. Seriously, think ClickFunnels, Calendly, MailChimp, Kajabi, and even your CRM all rolled up into one powerful white label solution.

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13:29Seriously, every question that pops up, they will have your answer waiting. And if you visit my special partnership link, you'll get a free trial. So visit highlevelfire.com to start your free trial and see why thousands of businesses are switching. That's highlevelfire.com where marketing, sales, and automation finally come together. High level, join the revolution. Adam, we're back and listen, Fire Nation knows this. It's not about cheating the system. It's about understanding it. So what is the number one mindset shift that we need to have when it comes to us paying less. I think that's exactly it, that it's possible and it's legal and it's not completely disruptive of your life.

14:12So I did a podcast a couple of days ago with my wife. It was my podcast, but we were talking about our process and we were outlining where do we start? And she said, well, we start with the money that you're already spending because there's so many opportunities there already to take advantage of savings on your taxes. So the reality is we're looking at a tax code that's tens of thousands of pages. Most of that tax code is targeted towards business owners. It's not targeted towards people that are showing up for a nine to nine to five and getting their their W-2 paycheck. So in there, there's so many opportunities.

14:51The tax code exists to generate revenue, but it also exists to create incentives and disincentives for business owners. There's certain things that the government wants you to do. So if you're not using this as a tool in your arsenal of being successful and making money and having a great business, you're definitely missing out on these opportunities. And I think the shift is, like I said, it's possible. And the accounting industry is quite broken. It's built on people dumping the box of documents on their accountant in the first quarter of the year and then waiting until April 15th to find out how much they owe.

15:30But when you hear about these millionaires and billionaires that don't pay their fair share, they're able to lower their taxes because for them, tax season never ends. It's year round. They're constantly looking for opportunities and strategies and things that they can take advantage of to reduce your tax bill. So I think that's a big mindset shift for a lot of people that once they learn that this is possible, then it's a it's a pretty easy conversion of, all right, where do we start and how much can you save me? So there's a difference between write offs and credits. Can you tell us more about that?

16:04I think this is another misunderstanding. So between my undergraduate career and my getting my MBA, I've taken intro to accounting three times, right? And that was when I decided to marry a CPA. The third time I took it, I think I got a B minus. But the general rule is this. When you talk about deductions in your business or write-offs, right, the IRS likes to see that they are ordinary and necessary, which is your cue to not get too cutesy with these. So the money that you spend in your business, like your rent, or if you buy meals, which you can only write off half of, or the wages that you pay your employees or the money that you spend on marketing or the equipment that you buy, those reduce your taxes, but only to the extent of your marginal tax rate.

16:55So if I spend a dollar on expenses and my tax rate's 30%, I'm only going to save 30 cents on that money that I spend. So that's why we talk about it not being a really great idea to spend money just to reduce your taxes because I'd rather have that dollar and not spend it than to spend a dollar just to save 30 cents on my taxes. So that's the general rule on that. Credits are a little bit different because those are a dollar for dollar reduction of your tax bill. So, you know, a common one, of course, is the child tax credit that if you've got a child who's a dependent, the government sends you thousands of dollars a year in a refundable credit that you can just put into your bank account and spend however you want.

17:36But for businesses, like I talked about, there's credits available for setting up retirement accounts. Or if your business is, if you're in the business of inventing things and creating things, there's this research and development tax credit that for the dollars that you spend, you can get dollars reduced on your taxes, not just cents. So we love that. And then of course, the big one that people have been talking about for the last few years that's now essentially over was the employee retention credit, that every dollar that you spent on wages, you would get 50 cents or 70 cents back in a credit.

18:09So it's a reduction of your overall tax bill, not just your profit and loss. So we love the difference there. And with credits, some of them are refundable, meaning it doesn't matter how much you paid in taxes, the government will send you a check. Other ones, you actually have to pay some taxes to take advantage of them. Fire Nation, it's critical that you know the differences between these things for the reasons that Adam is talking about. And there's one thing, Adam, that kind of has me scratching my head, which is property entity selection and what can it do? Because I'm just not quite sure.

18:41Let's start with like a basic example just to illustrate the point here. So we talked about how this is a conversation you should be having pretty frequently with your tax people. So we use the example that if you're a business owner and you're set up as a as a sole proprietorship or if you're set up as an LLC but you haven't made an S corporation election if you make$250 ,000 a year your tax bill is about 45 grand I I've done I've done the math for you uh with the marginal tax rates but you're looking at a$45 ,000 tax bill if you set up an S corporation which whether you have a corporation or an LLC, those are created under state law.

19:24The S corporation is a federal election that you can make that separates that entity from you for tax purposes. So the common strategy is set up your S corporation and put yourself on payroll as if you were a normal employee. And in that same example, if you're making$250 ,000 a year, you have to calculate a reasonable salary. Jackie would yell at me if I didn't clarify that. But the example that we use is let's say your salary is 80 grand. Like that's a reasonable amount that you would pay someone to do the job that you're doing in the business. So you're making 80 ,000 on your paycheck. You still have 170 ,000 of profit.

20:02It's still the same$250 ,000 of income, but you can reduce your tax bill to about$33 ,000 a year. That saves you, that one move saves you 12 grand every year, forever and ever and ever. And this isn't this isn't tax deferral. This is tax elimination. Like you never have to pay this. So it's really important to make sure you understand the tax consequences of the entity that you set up. But, you know, again, it depends on the client specific situation. Sometimes it's better to be an LLC that doesn't make the election. Sometimes rarely it's better to be a sole proprietor or we have we have some clients that we set up as C corporations, even though my entire educational career, they always said, don't set up a C corporation because it's double taxation.

20:49But it turns out that there are reasons to do that that can end up reducing your tax bill. So it's a really important conversation to have with your accounting team. Adam, Fire Nation's learned a lot today. It sounds like they can learn a lot more if they tune into your podcast. It sounds like you and your wife talk about a lot of important stuff that entrepreneurs, that business owners, that people that are making money and paying taxes need to know, should know. So give us a final call to action here. I want you to start with number one, the key takeaway from our entire conversation. Just give us one key takeaway that you really want to make sure our listeners get from our conversation.

21:24A call to action on how we can connect with you and your company. And then we'll say goodbye. All right, so key takeaway. Pull out your tax return because chances are your accountant sent it to you and you signed it and filed it, but didn't really look at it. Look at your 1040. That's your individual tax return. You're the one paying the taxes. And on page two, line 24, it tells you your total tax. It tells you how much you paid the federal government. So it doesn't matter what your estimates were, what your quarterlies were. That was your tax bill to the feds. Take a look at that and decide if you're happy with that number.

21:57And then you can respond accordingly. Usually when I give this presentation live, I say, you can go and throw open the garbage cans in the back of the room because most people have no idea what they're paying. So that's the big takeaway that I hope people, that's your action item. That's your homework from this episode. All right, so if you want to get more information, we've actually put together a pretty good guide on seven strategies that a lot of clients miss out on and potential clients miss out on. So we're giving that away for free at pennywise.tax forward slash fire. Fire Nation, you are the average of the five people you spend the most time with.

22:32You've been hanging out with A-dubs and JLD today, so keep up the heat. And for links to everything we talked about, just visit eofire.com, type Adam in the search bar. the show notes page will pop right up. And Adam, one more time, what is that URL? What is that call to action? They can get a free guide, seven commonly missed tax strategies that you should be looking at for your business. And Adam, thank you for sharing your truth, your knowledge, your value with Fire Nation today. For that, we salute you and we'll catch you on the flip side. Thank you. Hey, Fire Nation, a huge thank you to our sponsors and Adam for sponsoring today's episode.

23:06And Fire Nation, what can 4 ,000 of the world's most successful entrepreneurs teach you? How about how to achieve financial freedom and fulfillment? My first traditionally published book, The Common Path to Uncommon Success, is a revolutionary 17-step roadmap that will lead you to the lifestyle that you've been dreaming about. This book took me 10 years of accumulating the genius of the world's top entrepreneurs. And you can get it all in one place when you visit UncommonSuccessBook.com. I'll catch you there or on the flip side. fire nation this is your year to get unstuck and to grow a successful business attend the world's highest rated business growth workshop taught personally by clay clark and now featuring football star tim tebow and president trump's son eric trump at thrivetimeshow.com slash eofire again request life-changing tickets today at thrivetimeshow.com slash eofire are you ready for the ultimate all-in-one platform for entrepreneurs, marketers, coaches, and agencies.

24:02Build funnels, automate follow-ups, manage clients, and even white-label your own software. Say hello to our featured partner, High Level, and visit highlevelfire.com to start your free trial today.