Posts Tagged ‘small business’

Commingling is Killing Your Wealth

Commingling of funds (mixing business and personal funds) is one of the riskiest things you can do, causing serious legal and tax problems. 

The issue is less acute from a legal standpoint if you are a non-LLC sole proprietor. There are still plenty of tax issues, however.

LLCs and corporations are at extraordinary risk when funds are commingled. Treating your business as a personal fiefdom instead of a separate entity—which it is—can cause serious legal and tax issues down the road. We will deal with both issues in this post.

 

Legal Issues When Commingling

The real reason you should incorporate or organize an LLC is for legal purposes. Taxes come along for the ride. 

The tax code treats certain incorporated businesses punitively: notably attorneys, accountants and doctors. When people in these professions want the liability protection of a corporation they are considered a personal service corporation (PSC). 

Commingling money can cost you big in taxes. The best tax professionals refuse to work with clients who commingle. Don't overpay your taxes. Never commingle! #commingling #comingling #taxes #taxplanning #IRS #sidehustle #smallbusiness #businessA PSC is not entitled to the graduated tax rates of regular corporations and therefore pay tax at the top corporate rate on all profits. New tax laws lessen the tax issues a bit now that the top corporate tax rate is a flat 21%, but other issues still abound. 

For these reasons we saw large partnerships form for doctors, attorneys and accountants. (Making partner is something every CPA and attorney aspired to.) 

The problem with large partnerships is that legal liability can be massive in these professions. The tax hit was so large that insurance was a cheaper route than the higher taxes of a corporation, However, it was a serious disadvantage.

And with attorneys taking the hit it was only a matter of time before a solution was devised. (The first LLC was allowed in 1977 in Wyoming when the state passed legislation allowing limited liability companies.) The limited liability corporation (or partnership) was created. 

The good news is that LLCs are superior to corporations in many respects. Organizing as an LLC and then electing to be treated as a regular or S corporation is quite common. 

Before I outline how dangerous commingling of business and personal funds are, let me first outline the legal difference between an LLC and corporation.

Legal Difference Between an LLC and Corporation

LLCs and corporations are organized at the state level so the rules can vary between state. I practice as a tax professional (enrolled agent) so what I am about to share is how I understand the difference between LLCs and corporations as told to me by attorneys. Always consult a competent legal professional prior to organizing a legal entity (LLC or corporation).

This is the one difference, of many, between the LLC and corporation I consider the most important. It is best illustrated by using two almost identical firms facing a legal challenge.

Example

Two groups of twenty doctors join together to start a practice. The first group of doctors organizes as a corporation. It does not matter if they are a regular or S corporation as those are tax designations and we are only considering legal protection in this example. The second groups of doctors organizes as an LLC. They can elect to be treated as an S corporation, but they are still legally an LLC.

A doctor from each practice face a lawsuit. In the corporation practice all doctors are liable for the acts of each other doctor (all-acts). The doctor sued in the LLC is the only doctor liable; the other doctors are not liable for the acts of other doctors in the LLC (own-acts).

 

This is a huge advantage to businesses with multiple owners. Not only is there a legal wall between your business and personal wealth; there is a wall between you and the other LLC members and their actions!

Serve yourself a big, juicy tax cut by never commingling. Lower your taxes and reach financial independence sooner by following this one simple rule. #taxcut #commingling #financial #financialindependence #retirement #business #smallbusinessEach state has their own laws governing how this will work in their state. The state you organize in is the state laws you follow. (You can organize an entity in any state even if you don’t do business there.) 

Limited liability, whether from an LLC or corporation, can be pierced. You may have heard the term “piercing the corporate veil”. What that means is certain actions can cause your personal belongings and wealth to be at risk even though you have the protective entity structure.

 

I don’t know if I can shout this loud enough. If you commingle personal and business funds you almost certainly lose all the asset legal protections provided by the LLC or corporation!

 

So, when you commingle you lose the single greatest advantage to having the entity structure.

Here are two simple rules to consider when contemplating commingling:

Rule 1. Commingling invalidates your LLC and all your personal assets are at risk: lake house, mountain retreat, boat, kids college fund etc are at risk in a lawsuit or asset seizure. 

Rule 2. No commingling. If confused, see rule 1.

But it gets worse!

 

Tax Issues When Commingling

Losing all your legal protection is a disaster, but then you face tax issues.

Commingling is the bane of every tax professional. Poor recordkeeping is time consuming to fix when time is at a premium during tax season. Bad records are so common virtually all accountants charge more to deal with poor, incomplete or missing records when preparing a tax return.

An informal survey on social media shows many tax professionals refuse to take clients with poor records and even break the engagement if poor records are turned in more than a few years. (It’s low margin work with lots of stress when time is in short supply. Top level tax professionals don’t have time for this foolishness.) The author has disengaged many clients over the years due to commingling.

Cathy Bryant, a former IRS revenue agent told me, “The fastest way to get into tax and money problems is to commingle funds.”

What does Bryant mean by this? Well, when you commingle funds you really have no idea what your real income and expenses are. The mixing of business and personal funds means the IRS can run over you, causing you to pay more taxes, and you have no recourse because you have no idea what your numbers really are. 

If you are a corporation or partnership (or LLC treated as such) you have the added issue of basis. There is no room in this post for a detailed review of basis, but know this: If you don’t know your basis there can be some very nasty tax surprises in your future.

Also, the IRS can revoke your S election if you commingle funds because you are not treating the S corporation like a separate entity. This means you could face serious additional taxes in an audit without recourse. Re-read this paragraph again S corp owners until this sinks in. If the IRS discovers commingling in an audit it could bankrupt you!

 

Avoiding Commingling

I hope I put the fear of God in you with the warnings above. Every tax professional should keep this post and show it to clients who commingle or are contemplating it. Remind the client the next step is ending the engagement. (Most tax professionals require an engagement letter be signed prior to working on an account. The engagement letter outlines the services provided and fees.)

Your legal protection is gone when you commingle. 

The IRS has you when you commingle. The IRS auditor will assess more tax and get away with it due to your poor records and commingling of personal and business funds. Revocation of your S election will be a financial disaster.

Avoiding commingling is actually very easy. If you don’t want to handle the bookkeeping yourself, hire it out. It is cheaper than overpaying your taxes and losing legal protections

Here are the rules you should follow when you have a business, no matter how small. Even a side hustle treated as a sole proprietorship should follow these rules.

 

Rule 1: Use separate bank accounts and records. The easiest way to keep personal and business monies separate is to have separate bank accounts for business use only and records dedicated to the business. Use any bookkeeping software you want, even an Excel file works.

When the business needs money you can invest money into your company by moving money from your personal account to the business account. This will show on your Balance Sheet equity accounts as a contribution or investment. It will add to equity basis for tax purposes; a good thing, especially for S corporations.

Once your business is profitable you can distribute money to the owner: you. Record the transaction as a distribution. You may also have a wage from your business if you are an S corporation. The distribution is the profits paid you (think of it as a dividend on your invested capital) after your wage is paid.

 

Rule 2: Treat the business like the separate entity it is. If you were the CEO of Apple you would not mix your personal funds with the corporations. I know, I know! You are not Apple. But you should still treat the business, even if 100% owned by you, as a separate entity (which it is).

There is no problem with you investing in your business or distributing excess funds. To do this you just transfer money into or out of the business account. The transaction is recorded on the books of the business accordingly.

Never deposit a business check to your personal account! The business should never pay your personal bills, either! (Transfer the money from the business to your personal account if you need business funds for personal expenses. This will leave a clean paper trail sure to please your tax professional and thwart a zealous IRS auditor.)

 

Rule 3: Consider a loan to/from shareholder account.  You can also lend money to and from your business.

When you have a small business it is hard to always separate all expenses. For example: you might have one mobile phone for business and personal. Having two phone would not make sense for such a small business. Since the phone is in your name you can pay the bill and have your business reimburse you for the business portion, currently a 60% safe harbor.

The same applies to mileage, meals or any other hard to separate business expenses. Your business can reimburse you for personal payment of business expenses. This is called an accountable plan and acceptable to the IRS (and distinguished tax professionals everywhere).  

Don't let the IRS tax your credit card rewards. If you commingle business or side hustle money with personal funds the IRS can tax some or all of your credit card rewards. #creditcardrewards #rewards #creditcard #taxes #IRS #comminglingI understand many small businesses frequently transact funds with an owner. Rather than record each of these transfers in an equity account, consider using a loan to or from shareholder account. If you take many distributions during the year treat it as a loan to shareholder. On the last day of the year convert the loan to a distribution. It is cleaner than running numerous transactions through equity accounts.

Credit card rewards also cause many business owners to commingle funds. I understand you want the most cash back so you want to run personal and business on one card. 

This isn’t a problem as long as it is one card and not credit card churning. If you want to churn, don’t involve the business; it becomes a mess really fast with the legal and tax consequences listed above.

However, you can have one credit card for business and personal. Reconcile the business portion of expenses on the card. If you pay with a business check make sure you list the personal spending as a loan to shareholder. If you pay the credit card bill with a personal check either get a reimbursement from the business or record as a loan from shareholder.

 

Commingling is the bane of the accounting, bookkeeping and tax preparation businesses of the world. Keep business accounts and spending separate. 

Good tax professionals will either charge for fixing your books during tax season and are likely to disengage. Then you are left with a second tier professional, if you can even find one willing to deal with such a mess.

In a tax audit you don’t want a revenue agent to see you commingled funds. They will have a field day with you if you have. 

Most of all, you want clean books so you know where your business stands financially and can make better business decisions. 

And if your tax professional asked you to read this it means you either comply or are gone. Life is too short and tax professionals are under a lot of stress. Help them help you pay less tax. Never commingle funds.

Ever!

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Why You Should Rent to Your Business

One of the most powerful tax strategies a small business owner has is the S corporation. Under most circumstances when a small business has grown beyond $30,000 to $50,000 of annual profits it is time to consider organizing as an S corporation or LLC electing to be treated as an S corporation for tax purposes. 

The tax savings can be significant. A sole proprietorship is taxed at ordinary rates, plus self-employment tax. For 2019 the SE tax is 15.3% of the first $132,900 of partnership and/or sole proprietorship profits. (If you have wages from other sources this is included in the $132,900. Once you exceed that limit from all these sources combined the SE tax declines to 2.9%.) Partnerships pass profits to the owners where they pay the SE tax along with income tax. For partnerships, guaranteed payments to partners and profits are both subject to the SE tax. 

An S corporation does not pay income tax. Instead, all the profits are passed-through to the owners of the entity and taxed as ordinary income only; SE tax does not apply to profits passed to owners of an S corporation. Owners of an S corporation are required to be paid reasonable compensation. The remaining profits avoid payroll taxes (FICA and FUTA) and SE tax. 

Small business owners usually want some legal protections as well. The corporate or LLC structure is available to accomplish these goals. The LLC is more flexible with additional legal advantages than straight corporate entities.

Once organized, the LLC can then elect to take on the characteristics of other types of entities for tax purposes. The LLC does NOT have a tax form at the IRS. The LLC either defaults to a disregarded entity (sole proprietorship or partnership if more than one owner) or elects to be treated as a corporation. The LLC can elect S status if they inform the IRS they want to be treated as a corporation. These are two separate elections: electing to be treated as a corporation (Form 8832) and then electing to be treated as an S corporation (Form 2553).

I discussed these advantages in greater detail in the past.

 

Proper Allocation of Assets

If you had an attorney handle your LLC set-up and a qualified tax professional handle the structuring of assets inside and outside of the business you already know the S corporation rarely, if ever, has real estate inside it. 

The proper structure of a business where the owners also control the real estate is to organize the business LLC, treated as an S corporation, to hold the business only and a separate LLC, defaulting to a disregarded entity, for the real estate. The business LLC then pays rent to the LLC holding the real estate. 

Recently a reader on this blog asked why this is important:

Comment from Hobo Millionaire:

Keith, would you mind explaining the benefit of you renting to your business vs your business buying the building and paying a note over time. Is there a tax issue with the depreciation? You can depreciate/offset your taxes and the business can’t? A specific post on this setup, showing actual numbers, would be great.

We will discuss why you never want to own real estate inside an S corporation or an LLC treated as such. 

Most of the time it is a mild inconvenience only. Then there are instances where the legal and tax problems are significant and serious.

Every issue surrounding separating the business entity from the real estate holding entity are easily remedied. 

 

Legal Problems

There is no law requiring you to separate the business from the real estate. However, the LLC is a legal structure designed to protect the LLC owners. If the real estate and business are held within one LLC, the real estate is at risk if the business gets sued. Depending on the industry, this can be a serious issue or a low-risk probability.

Separating business from real estate also makes it easier to sell fractional ownership of each easier. If the real estate is held inside the business LLC it is impossible to sell the real estate (or business) without selling the same fraction of the other at the same time. 

Example: If you sell 10% of the business LLC and the real estate is held within that LLC, you have sold 10% of the business and real estate. 

Held separately you can sell all or a fraction of either the business or real estate in any fraction you want. You can also add another member (or have fewer members) to the real estate investment without also including the individual in the business side of the equation. 

Once real estate is inside an S corporation there is no easy solution to removing it. Tax issues of holding real estate with a business inside the same LLC can be significant. 

Removing real estate from an LLC is deemed a sale of the real estate for tax purposes. This means all the gains and recapture of depreciation are currently reported and taxed accordingly. Even if you are a 100% owner of the LLC and remove the real estate from the LLC to your name only (ownership really hasn’t changed, now has it?) you will be taxed on the gains! 

Therefore, if you have real estate inside an S corporation it might be better to keep it there even though it isn’t an ideal situation. You should consult a qualified attorney and/or tax professional with experience in this area of practice to avoid making a bad situation worse.

 

Serious Tax Issues

S corporations are not taxed except in a few situations. In each situation where an S corporation does pay tax the S corporation was a C corporation first for a period of time. (Electing S status at the time the corporation is organized means there was no time when the company functioned as a regular (C) corporation.) 

Holding real estate inside an S corporation with accumulated earning and profits (AE&P) from when it was a C corporation has tax consequences. 

S corporations are subject to tax on Excess Net Passive Income (ENPI) when :

  1. The S corporation’s passive investment income is more than 25% of gross receipts, and
  2. At the end of the year the S corporation has AE&P from when it was a regular corporation.

The ENPI tax rate is 35%! Lets look at an example of where an S corporation might pay the ENPI tax.

XYZ Corp elects to be an S corporation with AE&P. XYZ has $100,000 of gross receipts this year. Of the $100,000 of gross receipts, $40,000 is passive investment income (dividends, interest, rents, royalties and annuities). Directly connected expenses to the production of the passive investment income  is $10,000.

The net passive income is: $40,000 – $10,000 = $30,000

25% of gross receipts are: $100,000 x 25% = $25,000

The amount by which passive investment income exceeds 25% of gross receipts is $15,000 ($40,000 net passive income – $25,000 25% of gross receipts).

ENPI calculation: $15,000 / $40,000 x $30,000 = $11,250.

XYZ as an S corporation with AE&P pays a passive investment income tax of $3,938 ($11,250 x 35%)

 

Easy Tax Problems to Fix

The good news is that all deductions related to real estate ownership remain intact even when you separate the business entity from the real estate entity. You can still borrow against the building and deduct the interest on the real estate holding LLC tax return, as well as, depreciation and other expenses paid and related to the property. 

You can still have a triple-net lease between the real estate LLC and the business LLC. This means the business LLC can still pay and deduct insurance costs, repairs and maintenance, property taxes, utilities and so forth. Only the interest and depreciation goes with the real estate LLC. Rent is paid by the business LLC and deducted; the rent is claimed as income by the real estate LLC. 

There are times where the real estate LLC might show a large loss due to a cost segregation study or some other tax strategy. This means your business might be earning a large profit while the real estate LLC gets a special tax benefit that allows a massive deduction which causes that LLC to show a loss.

Passive activity rules tell us we are limited in some instances, especially when our income climbs above $100,000. This is easily solved with a simple election on the individual’s tax return. (The LLCs don’t make the election. It is taken on the personal tax return level.) Having a large loss on the real estate LLC if you are a high earner would be a problem if there were no outs. 

The good news, again, is you can group the activities. By grouping the real estate LLC and business LLC activities you are allowed all the deductions as if they were one entity on the personal tax return. This resolved the passive activity rule issues.

 

Final Notes

There are no drawbacks to separating the real estate and business into separate LLCs that I’m aware of. Every attorney I’ve ever spoken with agrees with me on this. Real estate should never be held inside an S corporation or LLC treated as such. Any tax negatives are easily resolved with elections.

The issues involved with combining real estate and a business under a single S corporation are many. Legally you limit your options and put assets unnecessarily at risk. The tax problems are hard or impossible to resolve without inflicting additional tax pain.

Structured properly your business and assets can enjoy legal protections while basking in the light of lower taxes.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

3 Steps I Took to Reach Financial Independence by Age 32

Do what this man did to become a millionaire by 32, starting from nothing. This man's story of growth is moving as we went from poverty in a rural area to massive wealth in a few short years. See what he did to accumulate his massive wealth and become a millionaire.The news feeds seem to be filled with story after story of people retiring at a very young age and how they did it. Most of the stories are very similar and goal always seems to be retirement and world travel. 

But what about the rest of us who want to continue making a difference in the world and refuse to bow to hedonism? 

Most people, I think, are unhappy doing nothing for long periods of time. Travel is fun until it becomes your full-time job. 

There are the hyper performers — the Steve Jobs’, Elon Musks’ and Warren Buffetts’ of the world — who never stop working and then there are the folks we see in the news feeds looking to check out at the earliest date. 

Most folks, however, are somewhere in the middle. They want financial independence for the freedom and security, but enjoy the social and productive nature of gainful employment. These people might work a traditional job, run their own business, consult or volunteer. 

That is what this story is about: How I reached Financial Independence (FI) by age 32, defined as net worth north of $1 million, and the steps I took to get there while retaining a happy and productive life.

The finish line will not include exotic travel. Instead, I focused on what I considered important: family and community. I still run the same business I did back then and I’m married to the same woman (31 years and counting and it just keeps getting better!). I’m most proud of my successful and happy marriage, though that doesn’t seem to sell considering the number of stories on long and happy marriages in the news feeds. 

So this is my story of how I accidentally discovered I was a millionaire.

 

Humble Beginnings

I never inherited a penny in my life and if I am so blessed in the future it will make no difference in my lifestyle. Born to a poor family in the backwoods of Nowhere, Wisconsin, I learned of family and hard work from little on. When Vince Lombardi said “Winning isn’t everything; it’s the only thing”, he gave my dad the adage, “Family isn’t everything; it’s the only thing.”

And good thing, too! When you live on a farm in the middle of nowhere there are not many folks to socialize with other than family.

We never had much money growing up is what I’m saying. We always had food on the table, but I remember when I was very young my dad put a piece of plywood across two sawhorses as our kitchen table. (Well, it seemed like luxury living to me!) We were happy because the outside world had not yet crept in to educate us to how backward we were.

Somewhere in this utopia I decided I wanted to be rich some day. It was probably the outside world sneaking in and corrupting a certain accountant in the room, but I had to be receptive to be tainted.

But there was trouble in paradise. The late 1970s were a difficult time for farmers. By 1982 when I graduated high school the writing was on the wall and I was oblivious. 

Less than six months out from graduation the farm was gone. I had no skills to sell in a world not hiring. In 1982 no employer was hiring in the county I lived in. It was so bad employers no longer kept up the illusion and didn’t waste paper giving you an application. The answer was NO!

I managed to save a bit in this environment. I turned 18 with a couple thousand to my name and no debt. 

 

Budding Entrepreneur

The money I had came from a variety of sources, a common theme in my rise to FI. In high school I got up every morning to milk cows at 4 a.m. After school I started milking cows again for 4 hours. I pulled a lot of teats, folks. You might laugh at that, but you would lose that grin if you were there.

For 56 hours per week I milked cows, plus other farm chores, and was paid $40 per month for the effort. I spent nothing! Not because I was smart, but because there was no place to go to spend the money. Town was a long walk and there weren’t many stores in the closest towns.

My freshman year of high school I joined the Future Farmers of America (FFA). To raise money members of FFA sold light bulbs. (Back then we only had the incandescent bulb which burned out a lot.)

I took to selling like a duck to water. I talked to everyone in town and every farmer within a day’s drive (I might be stretching the truth a bit). And when the light bulb drive was over I had sold more light bulbs than anyone in FFA history by a very large margin. 

I could sell. That is an important trait other articles on FI don’t mention. Working a job with good wages and benefits and living a frugal lifestyle has several glaring problems.

First, you might not have a high paying job. Minimum wage is not going to get you there by age 32.

Second, you might live in a high cost area of the country. 

Third, formal education and high IQ — and EQ — also make a difference

Forth, it assumes you are in good health.

Fifth, that you never lose that high-paying job while running for FI.

I certainly wasn’t connected and let me be honest here. I, ah, ahem, don’t have a college degree either. {cough} 

You heard me! I did take some college courses, but not enough credits or the right combination for even an Associates. And here I am with my enrolled agent license (the EA is a licence, not a degree) teaching other tax professionals and hiring highly educated people, some of whom have moved on and work for the IRS now.

Not being the smartest guy in the room or with the right education (or pedigree, I might add), I wasn’t on anyone’s radar as Most Likely to Succeed. So what did I do to reach FI so young?

 

3 Steps to Financial Freedom

From graduation day to my 22nd birthday I put those selling skills to work and managed to accumulate a $200,000 nest egg. And remember, this was back in 1986 when $200,000 was serious money. A $10 an hour job was good money in those days. (And I walked up hill to school (both ways) in snow all year around. Just sayin’.)

FFA decided to expand their light bulb fundraising to include garden seeds. There were no records to break as it was the first year offered. Needless to say, I sold a lot of seeds too. (Would you like some light bulbs with those seeds, sir?)

Ditch the job and start living. No more daily grind for the man. Instead, use these 3 steps you build your fortune. #retirement #job #finance #work #wealth I bowed out of selling for the school my junior year and started selling imported goods wholesale to retailers (and anyone else who would buy). I got my supply from a company called Specialty Merchandising Corporation (SMC). Oh yeah, those were the days. And, oh what a lesson I learned.

You see, people will buy over-priced cookies from young girls when it feeds corporate headquarters of a non-profit. But start selling stuff to line your own pocket and the number of “yeses” to “nos” changes radically!

So I improved my skill sets.

By the time I reached the age of majority I accumulated more experience than wealth. Sure, I had some money, but I wasn’t flush. The family farm was gone and that avenue of gainful employment with it.

I worked a short time in my dad’s agricultural repair business. It was tough sledding for dad back then, too. He’s doing well now, but in 1982 it wasn’t a pretty sight.

While working for dad earning a meager wage (money was preserved to pay other employees and to get the business profitable enough to feed a family of four) I worked 80 or more hours per week (record week on the job: 122 hours). I supplemented my income preparing taxes in the winter months. 

Before we knit our eyebrows in dad’s direction, understand it was survival back then. I worked long hours 7 to 9 months of the year (depending on the weather); January and February were light so I had time to prepare taxes. Late May got really busy and for the rest of summer and autumn. So I could earn more in a few months doing 50 or so tax returns than I could working day and night the rest of the year.

To be fair, dad paid me $40 per week, if memory serves, and later, $100 per week. (After I got a raise I quit. Ungrateful kid.)

Readers quick at math will realize this doesn’t add up to $200,000 in 4 years. And that is where we begin our journey of Steps to FI:

 

Step 1:

Unless you make a lot of money at your traditional job you will need multiple sources of income

Let’s count where all my money came from. 1.) Dad was paying me $160 a month, 2.) I was still selling SMC and profits were growing, 3.) I was preparing a small number of tax returns with virtually no expenses (gross margins approached 100%!) and, 4.) interest and dividends.

Interest rates were sky high in the early 1980s. Passbook savings accounts (remember those) paid a minimum of 5%, but most bank products yielded near or over 10%.

While bank interest was guaranteed and the rates mouth-watering, I decided I wanted to own a piece of America by owning stocks. I fondly remember one of my first purchases, a company called, ah, what was that now, oh, Phillip Morris (MO). And I owned a piece of Wrigley, too, until Warren Buffett screwed it up by funding the buyout of Wriggly by Mars, Incorporated for cash. 

I still own those shares of Big MO, now called Altria. The dividends were and are a growing part of my income and don’t think for a moment I didn’t realized the value of getting paid for not working; just for own a piece of a business.

I can’t stress enough how important it is to have more than one source of income. If all your income sources are in one basket and that basket withers you are screwed. You might put all your eggs in one basket with a business since each client is a separate income stream, but relying on one traditional job as your only financial resource is problematic. A simple layoff can destroy all your plans.

 

Step 2:

A few years later I got it in my head I would invest in real estate (RE) and go full-time as a tax professional. SMC died on the vine as I focused on building my practice and managing my RE investments.

Which leads to the second step I took toward FI: I owned income producing things (RE and the business) that I had a reasonable amount of control over. 

A job can disappear just like that through no fault of your own. The company can go belly up, the economy can slow, or your job gets outsourced.

Business and real estate have plenty of risk, but it was risk I could control. The Tax Code is never going away and when people try to stop paying less in tax I’m in trouble. Until then I’m golden. 

RE is also risky and comes with a mortgage to increase the incentive to get those units rented. Doing proper research before buying and joining your local apartment association (as I did) and applying some sweat equity increases your chances of success.

I used Step 1 above in RE as well. One vacant unit, if that is all you own, is a 100% vacancy rate. I bought several properties fairly quickly because I knew a few vacancies would only be a nuisance then rather than a catastrophe. 

I worked hard at my businesses. There was no free ride for this backwoods boy. Sometimes it hurt, a lot. There were times I didn’t know what to do. But I never stopped learning and never backed away from labor: manual or desk work.

In Step 2 I structured several income streams into something I had at least some control over.

 

Step 3:

You would think after my business was profitable and the rentals started throwing off reasonable income I could lean back and enjoy the ride. And if you think that you are wrong!

Retire early with these 3 steps used by a wealthy accountant to retire at 32. Early retirement can happen if you follow the simple steps this man used. #FIRE #financiallindependence #money #wealth #earlyretirement Before it was made popular by the tech industry, I always pushed my business into new territory. My goal was to create the company that would replace my business before competitors do.

I was the first in my community to offer free electronic filing. That might not seem like much now, but back then it caused my tax practice to grow explosively. When Wisconsin offered e-filing I was first on the list because the state knew I offered it for free and had no fraud cases. In other words, I could offer State of Wisconsin e-filing in my Wisconsin community for free before competitors could even offer the service. By the time e-filing was rolled out for all I had a commanding lead.

I also sold life insurance in the business for a while. I was never big on traditional life insurance, but key-man and for buy-sell agreements it made sense.

I was also a stock broker for a number of years before I realized I’m a tax guy first and hawking high-fee investments rubbed me wrong.

You can read this blog and see example after example of things I tried. Some ideas worked great; others I’d rather not mention (but share anyway so you benefit from my experience). 

And that is Step 3: Try an idea. If it doesn’t work, step back and reevaluate, then try again until it works. Never over-commit. Test small before jumping in with both feet. You don’t want to do something that destroys what you’ve built to-date. Once you determine you have a winner you can expand. Remember, most ideas don’t work! Trying a lot of ideas to see what works best before committing serious resources is a better way to reach FI at a young age.

 

Accidentally Get Rich

Of course, you need to avoid debt as much as possible and pay it down quickly when it arrives. You also must spend less than you earn if you are ever to build real wealth. You’ve heard it all before. It’s really simple. Spend less than your earn; invest in index funds; wait. If you want faster you better be good at sales or business; preferably both.

And this is where it gets interesting and how I discovered I blew past a $1 million net worth without even knowing it!

From age 22 to 32 a lot happened. My business grew and I got married. (Marriage brings in additional considerations.) Mrs. Accountant was open-minded, allowing me to funnel excess cash into investments rather than a higher lifestyle. I went from around $200,000 in cash to $1.2 million.

Remember the real estate investments I had? Well, eventually my dad, brother and I started a partnership with one-third ownership each. We bought a lot more properties. 

The bank that funded our RE holdings required we provide a personal financial statement every year or so even if we were not borrowing more money.

So I sat down to figure out what I was worth. I valued all RE holdings at what we paid for them rather than what I thought they were worth minus mortgages. I added retirement and non-qualified accounts. I valued my tax practice at zero and the practice had no debt (I only had real estate debt at the time).

As I added the values of all the accounts it started to dawn on me I might be a millionaire. I had a good idea what my share of the mortgages were and the assets were climbing too far above $1 million to drop below that level once mortgages were subtracted. 

When I struck the double lines below the bottom number it was clear I surpassed $1 million by a large enough margin to say I was a millionaire. 

Mrs. Accountant was in the dining room clipping coupons. I shared the good news. All she said was, “That’s nice,” and kept clipping coupons.

You see, I was more important to her than any amount of money. She lives frugally as I do and enjoys every day we are together. She saw, better than I, what was really important.

It was a let down in so many ways. Mrs. Accountant wasn’t excited about the money! I didn’t feel different either. I missed the big day when I crossed that magical seven-figure number. There was no bump or turbulence to indicate I crossed into another zone of existence. In reality nothing had changed; only my mindset.

Once I digested that it was only a number I decided to do what I always did. I tried lots more things, grew my business and expand my sources of income, much of it passive.

You see, I learned the most important step of all: It’s the journey that matters, not the destination. And I had the best mate in the world along for the ride.

It was that day when I was a 32 year old man that I learned to live life for the first time. Live, for Real. 

And I discovered I was always wealthy as long as I had my family.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Mr. Money Mustache Fired His Accountant

It was late May of 2015 when a wayward accountant from the backwoods of Nowhere, Wisconsin traveled to Cascadia. Tucked away in the Washington State foothills stood the Rainbow Lodge where a nondescript gathering of devoted followers of the emerging Mustachian movement were preparing for Camp Mustache II. This was our hero’s destination.

The goal of our accountant was to meet the Great One, Mr. Money Mustache himself, Pete Adeney, and present him with a business offer. 

The wayward accountant had a game plan. Since Pete had no idea who this crazy guy was he needed to build rapport before springing his devious plan on the unsuspecting celebrity. He had four days to build this rapport, present his offer and seal the deal. The pressure was on!

Since our hero was already attending the event he figured he could volunteer to give a short tax presentation. And wouldn’t you know it, the Big Guy attended the session and sat right in front of him, no more than five feet away!

Oh, well, figured our country boy. He went ahead with his tax strategy presentation. No more than ten minutes into the presentation and Pete interrupted, saying, “You’re my new tax guy.”

Gulp!

Cool as a cucumber, our backwoods accountant never missed a beat as he finished his session. When the session ended Pete introduced himself to the accountant and said, “When I say something I mean it. You are my accountant.”

 

Pressure

You would think the pressure would be off at this point. Mr. Backwoods Accountant had his foot in the door three days early. Not only did he have his coveted rapport, he had a new client; Mr. Money Mustache himself! (Can I squeal like a girl in delight now?)

But there was one problem. Mr. Accountant wasn’t looking for new clients. He had a business proposition to make and he had to figure out how to present it.

Honesty is the only way. Later the same day our hero pulled Pete off to the side and spilled the beans on why he was there.

He admitted to Pete he wanted to offer his DIY online tax software service, using MMM as the platform. Pete didn’t care for the idea. (Disappointment.) But he would be happy to mention the project on the MMM blog without strings attached. (Glee!)

But there was still one overwhelming problem.

 

Honesty

The story to this point is public information. I’ve shared this story in the past and many are aware of it.

What is not publicly known is why I wanted to make the business offer to Pete in the first place.

Sometimes getting fired is the best thing that can happen to you. The loss of a job or client opens the door for new opportunities. You can only grow when you deny the past and embrace the future.

Sometimes getting fired is the best thing that can happen to you.

The reason for the DIY tax software project was because I was ready to take a step back and start living the MMM lifestyle. Now that I ended up with a very visible new tax client that dream fell to dust. 

The DIY tax program is alive and well, thanks to the extra push Pete gave it in February 2016. However, the idea of slowing down and focusing on teaching the next generation of tax professionals had to be put on hold. 

The phone and email server started to smoke the traffic was so heavy. Mr. Money Mustache gets close to 10 million page views per month and his readers are devoted. They all wanted the same taxguy Pete had. This wasn’t going to work.

At its peak I was receiving over 300 emails a day that tax season just from the MMM blog alone. Just saying “No” to each request was a strain on resources. And these weren’t the simple returns either. These fine people took serious advantage of the tax code.

Instead of slowing down I was winding up at a rapid clip and it was wearing my team and me out. It took a few years to adjust to the New World Order. I had to learn to say “No” at a level I never imagined before. 

Employees were crushed by the onslaught. I still don’t understand how I survived the transition. Stress was higher than at any other time in my career. 

Let’s be clear. None of this was Pete’s fault. He had no idea what was about to hit me. Every action Pete took was to help someone he admired and liked. Pete and I became friends. And he empathized with my situation. He offered to break the links on his blog, but I begged him to keep them up. My ego was the only thing enjoying the ride.

 

Hell

My descent into hell was complete. I was adding new clients, but couldn’t keep up with the pace. The first tax season (spring of 2016) was non-stop triage. It wasn’t good at all.

The quality of my work suffered and I was exhausted. And my attitude started to show it.

This was NOT what I had planned. I couldn’t even dream something like this would happen. We’re country folk and live a fairly secluded life. More people contacted my office that year than there are people in the county I live in! Think about that for a moment.

The next tax season (2017) was better, but not my much. I wanted to help all these people and I still fantasized I could. I was saying “No” more, but still held myself open to more clients. It was a round robin at this point. When I said “Yes” to one new client I would lose another. And all the while Pete watched patiently.

Pete knew I was struggling no matter how brave a face I put on. He offered helpful guidance and even mentioned on several occasion I was working too hard. But I kept thinking, “This is Pete! He thinks everyone works too hard. I’m a Wisconsin boy. I can take it.” 

But I couldn’t and I knew it. 

I might be slow, but I ain’t dumb. (No comments from the back row.) Last tax season (the third since that fateful day at the Rainbow Lodge) I was starting to adjust to my new situation. I slowed the pace of client growth (I actually orchestrated a small decline) to a manageable pace.

 

Back on Track

The saving grace of this whole ordeal was automation. I was forced to think in ways I never had to before. 

My team did not fare so well. Every employee I had at the start is now gone. The last one left late last year, burnt out from the experience. My senior employee is now three years with me. It is hard sometimes to see how I could rebuild, but rebuild I did with my original goal back on track.

It could have been worse. You could have kept your job. Sometimes losing your job is the best thing that can happen to you. You now have the freedom to choose the path you want going forward.I’m one ornery backwoods Wisconsin coot that refuses to give up! I had a plan and it got detoured. Nothing more. 

After three plus decades in the tax industry my value wasn’t best utilized serving one client at a time. Yes, this blog does help spread the word and teach others. This blog isn’t enough, however.

With headcount lower and the door closed to virtually all new clients, I was able to focus on the original goals. 

To accomplish these goals I needed to focus on what I was good at: tax. I outsourced all payroll. Except Pete. Pete was my friend. I couldn’t do that to him. 

Bookkeeping—a low margin service—was curtailed to just those clients needing the service as it related to their tax situation. Automation and outsourcing did the rest

Last tax season was at least reasonable. Even my senior employee, Dawn, with me three years, noted the difference. Things were looking up.

Then I made a serious decision. It was time to explain to my friend, Pete, that he needed to have his payroll handled elsewhere and I facilitated the transfer to the service I use in my office. Pete contemplated doing it himself, but decided to take my direction.

Then I got the email.

 

You’re Fired

Pete saw the handwriting on the wall even if I wasn’t totally honest with him. He knew I was under tremendous pressure and was putting on a brave face for the world. I was the only one fooled into thinking nobody knew what was happening behind closed doors.

Pete is one of the smartest. most common sense, guys you’ll meet. His email was titled: Continued Collaboration Plans. Yeah, I can see a pink slip when I see one.

I wasn’t really fired (or is that FIREd) and it wasn’t a surprise. Discussions in our conference room at the office centered several times around the Pete issue: Should we continue doing his taxes? The discussion revolved around how narrow the office demographic had become. We wanted to return to a more traditional tax office. My teams—what was left of them—knew I still wanted to work out of the traditional tax environment and start preparing the next generation of tax professionals.

Pete had no idea. In truth, we never would have turned Pete away: he is too much a friend; I admire him and his work too much. Still, it wasn’t the right thing and apparently Pete knew it too.

Pete made very clear in his email how happy he and Simi were with my work. I responded I wasn’t as thrilled with my performance as he was. I knew where I dropped the ball. Stress and taking on too much are not valid excuses.

Then Pete said he wanted my blessing for a new tax accountant he found, saying,

But at the same time, I’d love to continue collaborating with you on whatever you see fit, whether it is talking about life, blogs, tax strategies, sending folks your way, or whatever.

Pete is all class, as if you guys didn’t know that already.

Pete finished his email with,

So my own taxes are just a footnote – I feel with your firm being so busy already, I’d rather not be a burden myself, and I also don’t feel comfortable sending too many additional customers at you, because you are all so busy already! As stated earlier, I want to be able to bring in more new firms to the fold so we can help more people.

Like I said, all class.

 

Overjoyed

(Don’t bail on me yet, kind readers. The best part is still coming!)

I shouldn’t feel such relief that the ordeal is over, but I do. Serving a very visible client is distracting at best. But the change will serve Pete, his readers, and even you, kind readers, better than ever!

I did something horrible, however. When Pete sent the email I could tell it was hard for him to write it. I waited almost a week to respond, though I saw it the moment it hit my mailbox. My response, you see, was equally difficult to write.

Pete gave some sage advice in his original email:

. . . your teachings through both the Wealthy Accountant blog and the in-person seminars have helped tens of thousands of people – or more. So I want to continue all of this! 

How could I let my friend down. He wanted me to realize my goal from five years back when we first met. You have no idea how humbled I am by his encouragement. 

I finally was able to write back what I wanted to say. Now Pete was overjoyed.

I wrote in my email:

Pete, I can only imagine the apprehension you had writing this to me. Understand I think your proposal is a good one so no worries. 

Rather than just assigning 2018 to his firm, let’s do this as a full transition to the new accountant. If he has difficulties I am available to consult; if he doesn’t live up to your standards I can always step in again.

I made it clear to Pete I was still on his team. His new accountant is close to his home and I am certain will do an awesome job. Because of the new tax law changes I will reach out to the new accountant (name undisclosed at this time for reasons obvious in above writings) to make sure he understands how this will affect Pete. That 199A thing is really important. I can provide guidance (my true value) and he can perform the application.

So you understand how overjoyed Pete was I didn’t take it personally, he started his response:

WOW, thanks so much for that helpful response! You are right that I was nervous that you’d take my request the wrong way. But as I said, it just seems like a win/win for everyone, so why not!?

I agree.

There is one more morsel to share later. You want to stick around.

 

Now for Something You’ll Really Love

While all this was happening, a certain accountant from the boondocks of Wisconsin was still planning and working hard toward his goals of serving his people better than ever before.

Outsourcing and downsizing certainly made a difference in the office environment. With new processes in place working and Pete doing what I should have presented long ago, I have been able to focus on things you, kind readers, have been asking for. And so far this has been the best tax season in well over a decade.

The best boss sees your potential and pushes you to reach for it. The best leaders bring the best out of others.

The best boss sees your potential and pushes you to reach for it.

Camp Accountant is now almost certain to happen. Before it was just too much to fit into an already crowded schedule. The new world order turns this into a real possibility.

Camp Accountant is tentatively planned for late summer this year in beautiful West Bend, Wisconsin. Attorneys, CPAs and enrolled agents will earn continuing professional education (CPE) credits for attending. No other camp has ever done that!

And I have another secret no one reading this will know.

This blog has been growing thanks to training courses I’ve taken. The best course by far is Moolah Marketing. Highly recommended.

The Moolah course, by the way, is remarkable in more than just driving traffic. Rachel Miller, the wonderful woman running the course, hammers first on identifying who your fans are. This is important as I’ll now illustrate.

When I started the Moolah course Rachel kept asking who my fans were and I kept saying the FIRE community. She kept telling me I was wrong. I finally figured out the FIRE community is only a small part of my demographic, but tax professionals scream for more of my work. The tax pros are my people!

What Rachel instilled in me is a new path for this blog, my work and fulfilling my original goal back in May 2015. Several courses in this vein will be produced by this blog or are in the works!

Rachel invited me on a Facebook Live and asked her people if they would like a course from me on 30 Tax Tips for Solopreneures. She said if 50 people were willing to pre-order I was obligated to create the course. It took less than 5 minutes!

So I need to be committed, ah, I’m committed to creating the course. Now I need to set up the order form (a future post will list details and how to order) and create the course. Due date is May. (This year!)

Here are a few more courses in development:

  • 20 Tips to Avoid Taxes When Investing in Real Estate
  • Build a Million Dollar Tax Practice
  • Investing For Dummies (May need to change the name due to copyright.)
  • Bookkeeping for Profit

We are floating more ideas.

This means I will be teaching more than ever. In the past I was locked into serving one client at a time. Now I will serve thousands at a time! If you have a topic you want my team to consider be sure to let me know.

Finally, you may have noticed a new feature here. I started a Find a Local Tax Pro page! (This might be what triggered Pete to email me. A few weeks after I launched I heard from Pete.)

If you need a tax professional, this is the place to look. If you are a tax pro willing to add more clients to your book and follow The Wealthy Accountant tax principles, allow me to add your name to the list. If your tax pro is awesome, be sure to point her to this resource. It is free and you can change or delete your listing anytime your situation changes with no fee. This is for the people of this community. 

 

Did Pete Finally Get Something Wrong?

I’ve known Pete for about 5 years now. The one thing you quickly notice is his clarity of thinking. Anytime I’ve asked for his advice or he just gave it because he saw I was in desperate need, he has always hit the nail on the head.

Pete gave me this final warning:

I’m not sure if I’d post the MMM new accountant thing just yet (and of course you never have to, I can always explain if ever needed that we still work together and collaborate) – but I’ll leave it up to you. In general, I find it’s good not to stoke the gossip engine, because people always get stuff wrong!

I feel this post is about more than Pete using a new tax professional. I covered a lot of material today that will serve your needs, kind reader, for a long time to come. 

I can’t be a mini-Pete forever; I need to strike out on my own in a direction I feel best serves my people, you.

Pete is right. People tend to get it wrong. Many will read the title and no further, building their entire opinion on those few incomplete words meant to drive traffic more than anything else. (Gotta get ya to read it before I can help you.) 

Just this one time can we prove Pete wrong. He is a good man. He’ll be happy to be proven wrong on this. This is a major step forward for this community and desperately needed. We need more qualified tax professionals and this is a serious first step. 

Now if you’ll forgive me, I need to find my handkerchief. I was just FIREd.

 

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Pricing Your Product in Your New Business or Side Hustle

Finding the right price to charge for your product or service will determine the success of your business. Learn how successful businesses find the price that maximizes profits.

Finding the right price to charge for your product or service will determine the success of your business. Learn how successful businesses find the price that maximizes profits.

“Start a side hustle or small business” is a common refrain when working to reduce debt or retirement planning is involved. It all sounds easy on paper until you realize most businesses fail within a year or so.

The problems with starting a business are myriad. Most businesses fail because they either have too little or too much business and the problems begin with the price or fee charged the customer.

Yes, some businesses fail over financing and other financial issues, but price frequently is the destroyer of small businesses. Charge too little and you end up with too much work and no profits to show for the effort; charge too much and nobody will even waste their time kicking the tires to see how good you really are.

The type of business also plays a role in pricing. A cheap attorney or doctor (or accountant!) is never a good idea. Even if it is a good deal you are unlikely to trust a cheap attorney. But what if you have a side hustle dog sitting? Is cheaper better then?

Then we get the loss leaders. Using our dog sitting example, do you offer a free trial to get clients in the door? It might work, but it costs the business owner money and time to promote in such a fashion. Research also indicates it is a poor way to promote your business.

Too Good a Deal

When I started my practice in the 1980s I subscribed to the “cheap is better” promotional school of thought. I was the first guy in town offering free e-filing for federal and was the only guy who could offer state e-filing the first year it was available because Wisconsin wanted to test their program with firms that offered the service for free and had no fraud cases. I fit the bill and the rest is history.

The free e-filing is a good example of giving something for free to grow your business. I still was paid for preparation services; only the e-filing was free. The benefit cost me nothing and saved time. My software provider only charged me a dollar and I saved that in toner and paper not printing copies to send to the government. This also saved time so I was a net winner. The best deal around town outside my office was $25 for e-filing. By the time other firms caught on it was too late. I was well established and well known for my progressive business ideas.

There was still one small problem. I prepared tax returns for a low fee. The goal was to grow the business fast and large. This is a massive problem when the service provided frequently required I personally work on or review most tax returns. I was providing value added service but not charging for it. That led to long hours and lower profits. Something had to change.

Quality or price, you can't have both. When you provide high quality service you deserve a higher price. See how professionals set price to maximize profits.

Quality or price, you can’t have both. When you provide high quality service you deserve a higher price. See how professionals set price to maximize profits.

By the time my practice reached 2,000 returns I was exhausted. Sure, anyone in the office can prepare a return. So can any other tax office. But not many can reduce a clients tax liability legally the way I can. That takes experience, skill, research, and most of all, time.

Around the year 2000 I was preparing about 1,600 individual returns  with another 400 business returns, amended returns and returns from prior tax years. Many clients walked in the door when I was giving my services away and I wasn’t bringing their fee to a reasonable level fast enough to regain my sanity. That, and attempts to increase prices brought loud complaints. It was exhausting. People wanted more and more without paying for it. Worse, clients didn’t take my advice seriously! What was it worth anyway? I gave the consulting away for fee and clients treated it as worth exactly that much.

The first year I decided to make a draconian cut. The tax software I use allows me to pull reports based on time spent preparing the return and the fee charged. I ran a report showing the least profitable to most profitable clients. To my surprise I had almost 400 clients that were money losing accounts! (I know, I know. I’m not proud of it either.) Those 400 clients were send a letter kindly asking them to leave.

That was the best tax season in years. Prices were not increased much, but the money losing accounts were out so I had time to breath and profits actually climbed because expenses dropped faster than revenue.

The next year I raised fees significantly. My real clients stayed. Fewer people left than I anticipated. Something else also started to happen. Clients, especially business clients, started saying it was about time I raised my fees so people would start respecting my work. Clients saw what I was blind to! People actually wanted to pay me more because they saw value and all the bottom feeders were sucking me dry, hurting the serious clients. In hindsight, I’m feel great gratitude these clients were willing to wait until I regained my sanity.

Perceptions of Value

How much do you value the endless supply of news online? Do you trust it? What if you pay for a newspaper? If you are like most people, paying for something causes you to value it more. It may have something to do with the sunk-cost fallacy businesses fall prey too. Regardless, we understand “free” does not bring out the best. A free report is valued lower than a report you pay for and for good reason. When a payment is made/received all parties expect a certain level of value to be provided.

But free works so well! But not really. In my line of work I see plenty of businesses. I know what does and does not work. The “free” thing has been done to death. The philosophy has destroyed more businesses than any other policy I know of. Free meals mean nothing to a restaurant if the food is no good. All free does is sink your boat faster.

Back to our dog sitting example. Giving away a free day when you have no way of creating more time is a rabbit hole you do not want to fall down. Instead, a free doggie treat might be a better way to promote the business. You still charge your regular fee, but you give something extra of value. The perception of value remains intact. The people who would turn their pet over to a free service are not the kinds of clients (and dogs) you want.

 

Finding the Right Price

Over the years I tried many methods of pricing my services. Checking the competition and pricing comparatively is the most common method of pricing I see and used it myself in the early days. It’s also the worst, except for the free or super cheap thing we talked about above.

Setting your prices/fees similar to or a nickle below competitors means you get paid nothing for any added value you provide. Here we are again at the trough of free stuff. If you charge what the other guys charge what is the incentive to use your product or service? If you provide greater value there is a reason to patronize your business, but you don’t get paid for the superior product if your only pricing method is to undercut competitors.

All these pricing issues lead to two problems: 1.) you are either too busy (or people don’t trust you’ll do a good job) due to your under-priced goods and services which leads to poorer quality as you are run raged, or 2.) your fee becomes over-priced compared to what competitors are selling due to market changes before you differentiate your product.

You can’t win if you do not differentiate your product or service. The differentiation is where the value is created and where clients are happy to pay your fee even if it is high.

There is a better way and I learned this trick from two men I highly admire: Seth Godin and Tim Ferriss. Seth Godin is well known from his numerous best-selling books; Tim Ferriss from his books and podcast.

Recently Tim invited Seth to join him on his podcast. It may have been the most important podcast I ever listened to.

Seth shared his method for setting prices for his speaking engagements. He said he only has two prices: free and full price. If Godin really wants to do the gig and if it is for a good cause he will sometimes do it for free. Otherwise his fee is full price, no discounts.

Wonderful! But how does Seth Godin find his price? Simple. He started by setting his price so a few people would hire him. Once someone—anyone—offered him more that was his new price. As simple as that.

However, this is simple theory, difficult in practice. Godin admits it’s tempting to take a gig when your calendar is empty. It takes time to learn the skill of saying “no” when you have lots of white space on your calendar. But if you don’t stick to your principles you dive head first down the aforementioned rabbit hole. And it is going to hurt really bad.

Higher is Better for Everyone

It may sound crazy, but a higher price is frequently better for the business and the customer! People will pay for quality and those who will not are not the kinds of people you want to serve. Remember, you’re a business, not a slave! You solve problems, fill a need. And do it well! You should get paid for that and paid well. If you don’t it is only a matter of time before you either quit or sacrifice your ethics and provide cut-rate products and services.

The fear business owners have when raising fees is the worry clients will leave. Well, I hope so!

Not everyone wants or needs the higher level of service and quality. Your choice is to produce crap and sell a manure spreader load full of it or to sell a respectable amount you can comfortably provide  at the highest quality money can buy. Either way is fine. But, crap gets old fast while quality instills pride and that carries you a lifetime and makes you feel proud of the work you do.*

Last year my small tax firm prepared around 550 tax returns in total. This is a long fall from the heady days of 2,000+ returns annually. It was the best tax season in years as I worked hard to adjust to my new worldview of a tax office with national exposure. This is easily the most difficult transition I ever went through. There were times I didn’t know if the firm would survive.

Here it is mid-January and I’m nervous. One of my preparers thinks I committed to around 650 returns for this tax season. (Was it that may?) If it’s true I have a real problem. I spent heavily on increased automation and productivity enhancements. However, the clients I serve now are of a different caliber than of the past. These are large returns with serious issues and I’m one guy. (Yes, my team does most of the heavy lifting, but I need to be in the final review process for virtually all returns so clients get maximum value.)

Finding the right price to charge is as important as the service you provide.

Finding the right price to charge is as important as the service you provide.

Fees have steadily climbed. As fees climbed some clients left. Revenue still climbs because fewer people leave than the fee increases. The higher fee allows me to add more value to each return. This means lower taxes for clients so my fee is really free after tax savings are included. But, Dawn, my ace tax preparer, and I will sit with every client this year. The last few years we allowed other team members to handle this. I hated it because I need to know my client better and the new system will allow for it as long as I don’t grow the business too large. (Clients living further away will have more phone time with us.)

The goal is to always provide a better experience for the client. Quality is important as long as the client feels respected. Doing the best work and ignoring the client is still bad form.

And don’t worry about losing all your clients. I’ve experienced that emotion all too often. Let me sooth your nerves with a story: This blog has produced an excessive flow of consulting clients. I love the work and with rare exception the client walks away from the consulting session with thousands or even tens of thousands in tax savings. There is a reason for the high demand.

I consult with new clients from June to December on Tuesdays and Thursdays. The max, I discovered, is two consulting sessions a day. Any more and the research and face time exhausts me too much. (Regular clients can have consulting sessions any time of year, even tax season.)

The past year I charged $275 an hour. When the new consulting season starts in June the fee is $350 per hour. Still a good value when thousands in taxes are saved.

You would think the fee increase would slow things down. It didn’t. June is already filling up six month in advance! Kind readers, please understand. People are hungry for top-quality service and products! They are sick and tired of junk. The more I raise my fee the more people know I’m focusing on increasing the value even more. And they want this even higher value product more!

Let me make one thing clear as we wrap this up. This is not about bilking the client. This is about serving the client at the highest level possible and pushing higher from there. You are good today; you’ll be even better tomorrow as you learn and accumulate more experience. People want that!

The increased consulting fee means I will work slightly fewer hours and, of course, will make more. But cutting the hours just a bit allows me to learn and grow more as I have the time to research ideas and strategies. This makes every hour of my time purchased worth significantly more.

Tax preparation fees are the same. Cheap is NOT better. Cheap means a shortcut was taken. You can’t do it profitably any other way. What you save in accounting fees is lost to your least favorite uncle in Washington. I’m not close to the cheapest. I played that game before. I’m embarrassed to say it because that means my clients were screwed by my lack of experience in those days. If I’d have raised priced I might have done a better job earlier in my career.

As for the dog sitting side hustle: People love their pets and want the best for them. Charge more and include a doggie massage and doggie treats. The dog and the human will thank you for such kind consideration.

As a bonus, you’ll have a profitable and successful business you enjoy running ever day. No retirement for you; you’re already living the dream.

 

* If you work at a job and hate it there is a good chance you work for a company peddling as much crap as they can flush out the door. People who work for companies that provide high quality products or services are almost always a pleasure to work for also.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

PeerSteet is an alternative way to invest in the real estate market without the hassle of management. Investing in mortgages has never been easier. 7-12% historical APRs. Here is my review of PeerStreet.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

 

Micro Business and Side Gig Tax Guide

Enjoy all the tax benefits allowed for owning your own micro business or side gig.

The reason for starting a side business are legion. Maybe early retirement left you with more free time than you know what to do with. Maybe you took early retirement a bit early with the intentions of earning some side income. Or, personal or family issues limit the hours available for gainful activities.

Micro businesses are a great way to earn more money without a massive expenditure of time. You can enjoy the best of both worlds: reasonable income and freedom.

But there is one factor that causes more headaches than any other: taxes. Micro businesses/side gigs have special tax rules that can cause serious problems, or, if done correctly, virtually eliminate your tax bill.

I’ve published on this in the past, but new tax rules require I provide an entirely new guide. Several notable changes require your attention. A misstep will cost you hard-earned tax dollars; a well thought out plan allows you to keep most or all of your side gig income.

 

Highlights of the Changes

First we need to define what I mean by a micro business or side gig. For this discussion I consider a business micro if profits (not revenue!) are less than $30,000 annually and are expected to remain so in the future. This profit level is confined by economic and personal factors. You still have a micro business if you elect to remain small.

By eliminating businesses with over $30,000 of profits we also limit the choices when we plan for taxes. That allows for a detailed analysis of the issues without concerns for larger side gigs.

One of the large changes to the micro business environment involves hobbies. In the past (2017 and prior) hobby income was reported on the front page of Form 1040 with expenses deducted on Schedule A as an itemized deduction. Hobby expenses could not exceed reported income from Form 1040 and the expenses were combined with multiple other deductible items (job search expenses, safe deposit boxes, tax preparations fees, et cetera) and then 2% of adjusted gross income was subtracted.

Starting in 2018 hobby expenses are no longer deductible in any amount while income is still required to be reported. The revamped Form 1040 also means you need Schedule 1 to report hobby income (see inset).

Where to report hobby income on a tax return.

Where to report hobby income on a tax return.

 

The other big change for micro businesses comes from §199A, the Qualified Business Income Deduction. This new animal allows for a 20% deduction on certain business income (profits) without an out-of-pocket expense. We don’t have to worry about limitations since we are focused on businesses/side gigs with under $30,000 of annual profits.

 

While tax code changes didn’t affect LLCs, S corporations or regular corporations (the C corporation), there are considerations for micro businesses when it comes to entity formation.

 

The Hobby Decision Tree

Even without the possibility of deducting any hobby expenses, there are times being a hobby might be advantageous. Before we begin this part of the discussion you should review this article to refresh your memory of who can and cannot report income as a hobby.

Why would anyone want to report income as a hobby? First, you may actually have a hobby rather than a sole proprietorship (a small business for tax purposes). Second, there is still a possible tax advantage to hobby income over small business income.

Hobby income does NOT incur self-employment tax on the income. A hobby with few expenses will be taxed less as a hobby than over a sole proprietorship.

Enjoy all the tax benefits allowed for owning your own micro business or side gig.

Enjoy all the tax benefits allowed for owning your own micro business or side gig.

Example: Fred has a hobby building model ships. He sells a ship every 4 or 5 years without a profit motive; he just likes building model ships in his free time. He meets all the criteria of a hobby. If Fred sells a model ship for $5,000 and reports it as business income he will face income tax at ordinary rates (determined by his income level), plus a 15.3% self-employment tax. Reported as a hobby Fred would not pay around $750 in SE tax. He would still pay income taxes on the hobby income at ordinary rates.

Once the self-employment tax issue is understood (or experienced), smart taxpayers start pushing their tax professional to list income as hobby versus small business income. However, you are automatically considered a business by the IRS anytime you turn a profit in 3 of any 5 year period. 

There are ways around every problem. First, you don’t have to conduct the same hobby every year. If you report hobby income every year, but from significantly different hobbies you should be prepared to explain to Revenue your position. (I would actually explain it with an attachment to your tax return every year you report hobby income in 3 or more of any 5 years.)

Second, you can enjoy your hobby like Fred. Fred loved the process of fleshing out a detailed ship from times past. He would spend a year or more on each masterpiece. Fred doesn’t have to sell a ship every year. He can sell his growing cache once every 4 or 5 years. (His wife might require Fred to divest in his some of with hobby creations due to space limitations. She might get sick of cleaning the growing horde of ships decorating every corner of the house.)

Because Fred has few expenses (perhaps $500 or less per ship) most of his income from the sale is profit. However, since he is a hobby he avoids paying self-employment tax on top of income taxes.

How do new tax rules affect your hobby decision? While avoiding self-employment tax can be enviable, hobby expenses are no longer deductible, meaning your income tax will almost certainly be higher. Your other income determines your tax bracket. High earners might be better off as a business than a hobby once expenses are considered.

Finally, don’t succumb to temptation to cheat. The IRS watches hobby income and gets irritable when the line is crossed. Yes, if Fred had a model ship hobby where he completed and sold a ship every 5 or for more years for $80,000 he could avoid SE tax. But he better be prepared to explain why he isn’t really a business. Be sure to read the article from the link about to gather a better understanding of where the line is if you plan on reporting income from a hobby.

 

Business Deductions

Business deductions that are “ordinary and necessary” and that are reasonable are allowed. This is a very wide road to travel.

Your business structure doesn’t change what can be deducted. A sole proprietorship, regular corporation, S corporation and partnership can all deduct reasonable ordinary and necessary business expenses.

Let’s talk about common deductions first. Anything related to your business is usually deductible. Advertising, rent, utilities, office supplies and bank fees are just a start. A painting to decorate a wall at your business or home office is ordinary and necessary because it creates a better profit producing environment. (A Picasso would not be reasonable and would be disallowed for all but the largest of businesses and even then might be a problem. Remember the expense needs to be reasonable.) Desks, computers, chairs are also business expenses, though they may need to be depreciated over a number of years.

There is a sweet spot in business deductions, too! While cash going out is easy to record and deduct, non-cash deductions are easily forgotten. You may qualify for an office in the home. With the standard deduction much higher now the office in the home might be a way to benefit from some of your mortgage interest and property tax expenses.

Explore all the tax benefits of a side hustle with this Micro Business and Side Gig Tax Guide.

Explore all the tax benefits of a side hustle with this Micro Business and Side Gig Tax Guide.

Mileage is another expense without an easy correlation. The mileage deduction can exceed actual cost, creating an additional non-cash deduction.

Meals and entertainment offers a choice when traveling. You can use actual expense or a per diem. The per diem can exceed your actual outlay providing another non-cash deduction. The beauty of this method is that you can choose which method you use for each business trip. High meal expense trips can use actual expense and low meal expense business trips can use the per diem.

Bonus depreciation is 100% this year for most new assets. The de minimis election to deduct rather than capitalize tangible property with a class life of 20 years or less and with an initial cost of $2,500 or less also allows for faster expensing of most business assets purchased.

You can even estimate some expenses! If receipts are lost or destroyed you can use reasonable numbers for expenses, except for meals & entertainment, travel, auto expenses and listed property. Advertising, supplies and postage can be estimated if records are unavailable. Be sure to review the rules with the link at the beginning of this paragraph to avoid problems.

And here is a final deduction nugget frequently overlooked. If you have a customer appreciation event, Christmas party for the office or other business event at your home you can charge your business a reasonable fee (deductible) and not report it on your personal return (tax-free) if you rent out your home for 14 or fewer days per year. To determine “reasonable”, check around locally for the cost of renting a similar facility. As always, document ad nauseam.

 

Retirement Planning

Even the owner of a micro business can reduce or eliminate income taxes.

We turn now to deductions that amount to moving money from one hand to the other and receiving tax advantages as a result.

There are a host of retirement plans available to micro business owners unless the income is classified as hobby income.

SEP plans are probably not the best choice for a micro business due to contribution limitations based on income. (20% of a $20,000 profit is only $4,000).

401(k) plans, including solo plans, allow for larger deductions ($18,500 in 2018 and $19,000 in 2019) but can have higher fees than other options.

If other income doesn’t preclude an IRA contribution you then have a choice: Roth or traditional. The maximum contribution allowed for either is $5,500 in 2018 and $6,000 in 2019; folks 50 and older on the last day of the tax year can add an additional $1,000.

If the traditional or Roth IRA are not allowed or not enough for your needs you should consider a SIMPLE IRA. SIMPLE IRAs are just the way they sound: simple. They are simple to setup and maintain with low fees, if any. Investment houses like Vanguard and Fidelity will help you with the process if you have issues. The best part of SIMPLE IRAs is the higher contribution limits: $12,500 ($13,000 for 2019) with a $3,000 additional catch-up provision for those 50 and older on the last day of the tax year. Also, you can contribute 100% of your business profits up to the contribution limits! This means if your micro business earns $10,000 per year you can contribute the entire amount, avoiding income tax on your business income (SE tax is stilled owed on business profits regardless of retirement plan contributions).

 

§199A: The Qualified Business Income Deduction

This new and unique deduction is in the news a lot lately. The Code is vague on certain issues at it pertains to the §199A deduction. While vague may sound like a problem, tax professionals deal with vague tax issues all the time. It comes with the territory.

We can avoid many of the complicated issues because we limited our discussion to micro businesses of less than $30,000 of annual profits.

Owning a micro business/ side gig/ side hustle is rewarding and profitable. Use this guide to pay the least amount of taxes with your venture.

Owning a micro business/ side gig/ side hustle is rewarding and profitable. Use this guide to pay the least amount of taxes with your venture.

Real estate investors of income property can also benefit from the 199A deduction. (Generally an income property investor must meet the definition of a “trade or business” (undefined as of this writing) before taking the QBI deduction up to the level of profit or 2.5% of the original basis before adjustment, whichever is less.)

Regular corporations saw a massive reduction in their marginal tax rates, except for the lowest bracket which was increase from 15% to the flat rate for regular corporations of 21%. Unlike partnerships, S corporations and sole proprietorships, the §199A deduction does not apply to regular corporation.

Revenue issued some guidance on the QBI deduction. One thing is certain, the deduction is allowed for all business entities, except regular corporations. Partnerships that pay guaranteed payments to partners (the paycheck portion paid to owners of a partnership, in a manner of speaking) will reduce the QBI deduction.

Example: Sally and Mark form a 50/50 partnership to sell widgets. They have one part-time employee. The employee receives a weekly wage and a W-2 at year-end. Sally and Mark agree to pay themselves $100 per week. They do not get a W-2! Instead, their payments are considered guaranteed payments to partners. If profits are $20,000 after all expenses, including guaranteed payments to partners, they use $20,000 to calculate their QBI deduction of $4,000.

S corporations generally require more than $30,000 of annual profits to be a viable choice for tax reductions. If you have an S corporation you must pay reasonable compensation to owner/employees which reduces the QBI deduction.

Sole proprietors do not pay themselves a wage or receive a W-2. Instead, they take draws. QBI is generally the reported profit of the sole proprietorship without regard to self employment taxes. Once again, multiple by 20% and deduct.

The QBI deduction is not taken at the entity or business level. The deduction is claimed on page 2 of Form 1040, Line 9 (2018 tax forms).

Claiming the Qualified Business Income (QBI) deduction(Section 199A) on your tax return.

Claiming the Qualified Business Income (QBI) deduction(Section 199A) on your tax return.

Caution! My journals have some conflicting advice on reasonable compensation to S corporation owner/employees and guaranteed payments to partners. Before Revenue released guidance on August 8th some felt guaranteed payments to partners and reasonable compensation to S corporation owner/employees would be added back before calculating QBI. Sharp readers called me on this. The reason for the assumed (by some people) add-back before guidance was released is so high earners couldn’t play with reasonable compensation to qualify for the QBI deduction in certain service businesses. Guidance now indicates QBI is profit after reasonable compensation or guaranteed payments.

Planing tip! Because S corporations require reasonable compensation to owners/employees, micro businesses probably do better as a sole proprietor since there are no wages to the owner to reduce QBI.

 

Entity Selection

I preach LLCs treated as S corporations a lot. However, micro businesses rarely benefit taxwise from such a structure. In most cases S corporation treatment does not lower taxes enough to offset costs of organizing as an S corporation until profits consistently exceed $30,000. Even $30,000 is really low! I prefer to see $50,000 or more before deciding to switch to an S corporation and only if it appears profits will remain north of $50,000 in future years.

We are discussing micro businesses of under $30,000 of annual profits so organizing as an LLC is fine for legal purposes, but electing to be treated as an S corporation is a questionable move if taxes are the reason why.

Your S corporation may have started as something bigger and withered over the years as you downsized. Keeping the S corporation may be more convenient than moving to a sole proprietorship.  For these reasons we’ll touch on S corporations.

S corporations generally pass all their profits to the owners on Form K-1. The QBI deduction is not lost! Rather, as stated above, owner’s wages are added back with 20% of this higher total deducted on page 2 of Form 1040.

We already discussed partnerships above.

While I focus on tax considerations, entities serve a legal purpose as well. I encourage you to discuss the legal ramifications of entities with a competent legal professional.

While the sole proprietorship is easy to organize, it also pays the most tax of any form of conducting business. Sole proprietors also face a highest federal audit risk, around 4% per year. Corporations (regular and S) and partnerships are audited at well below 1% per year. For this reason  alone you may wish to organize even a micro business as an S corporation, regardless of the tax ramifications.

 

The Best Tax Choice

Here is a step-by-step guide to deciding how to manage your micro business:

  1. Are you a Hobby or business? It makes a difference. A hobby is by far the easiest way to report income. But no expenses are allowed while SE tax is avoided.
  2. Choose an entity structure. An LLC provides legal protections and takes on the tax flavor you want. A single member LLC defaults to a sole proprietorship and if there are two or more owners to the business, partnership is the default. These are called disregarded entities (disregarded for tax purposes only, not legal purposes.)
  3. Make sure you don’t miss any deduction.
  4. Take advantage of the QBI deduction.
  5. Consider retirement plans.
  6. Enjoy! It is a micro business for a reason. Your goal is a bit of extra money while engaging an enjoyable activity.

 

Note: Technical corrections were made to this article. The complexities of the Tax Cuts and Jobs Act have caused serious issues when tax planning. The IRS issued some guidance on August 8, 2018, but more issues remain. Tax professionals are encouraged to contact the author if they disagree with a statement here. I have attended several training programs this year on the new tax rules and there are areas of disagreement between programs. I’ll make additional technical corrections as they are discovered by readers (or me) or further guidance is provided by Revenue.

 

More Wealth Building Resources

Credit Cards can be a powerful money management tool when used correctly. Use this link to find a listing of the best credit card offers. You can expand your search to maximize cash and travel rewards.

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

cost segregation study can reduce taxes $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

My Tax Plan If I Were President

Taxes laws are a mess. I have solutions to simplify taxes and lower rates. Using humor, I share tax tips for deductions for individuals and small businesses. I also address the politics behind such required changes. #wealthyaccountant #taxhumor #taxdeductions #taxtips #smallbusiness #funny #politics #presidentIf you’re reading this the day it’s published it means this is the due date for extensions for partnerships and corporations. If you work in a tax office and things are quiet you might want to consider another job. (This is an inside joke directed at a former employee who struck out on her own. If you need bookkeeping in Vegas I know a qualified person to handle that. Seriously.)

I thought today would be the perfect day for me to announce my candidacy for president with a few tax policies I’ll sign into law via executive order if elected. Some of you might be darn excited about this unwelcome event as you think I’m a Democrat. Other might be excited because they think I’m a Republican. The truth is I’m neither. I prefer to waffle between both side of the aisle or as the police call it: walking in a drunken stupor.

As much fun as I’m going to have writing this, I am also dead serious. What follows are tax policies I would like to see instituted. Some things will sound very liberal and some things will sound downright conservative. Basically, I should tick off just about everyone in the room with something.

Welcome to politics.

Ground Rules

Before we start I want to point out some things I plan as president are not completely tax related. For example, I will deal with the minimum wage, but connect it to tax policy. The same with welfare of every kind. Along the way I’ll fix the health care issues of the United States by default and solve trade issues and immigration policy in a way everyone will love until I’m elected. Then a third will love me and two-thirds will hate me until we approach the next election. Then the population polarizes and it ends up a dead heat until I’m assassinated re-elected.

Tax policy controls everything. Al Capone gets away with murder until they called in the Treasury Department. (It worked!) Welfare once required a trip to Social Services. Now it’s handled at the tax preparer’s office. Corporate welfare is even worse.

Trade disputes sometimes result in tariffs, an excellent way to tax your own people while convincing them it punishes the other country. (Don’t underestimate the ignorance of voters.) Once again important issues of national importance end up in a tax bill.

So, let’s get down to business. I’m confident I’ll win your vote.

Simple and Basic

With the exception of my own profession, everyone should love the basic framework of my tax plan. Republicans lowered tax rates to the lowest level since taxes were collected in this country. And I think they’re still too high!

For individuals and families: I propose to raise the standard deduction to $100,000 for joint returns; $75,000 for head of household returns; and $50,000 for single taxpayers. That means a married couple filing jointly can enjoy their first $100,000 of income tax free! (I know! It makes me giddy too.) Exemptions were eliminated with H.R. 1 and I don’t want to rock the boat so all you guys get is a huge standard deduction. In fact, itemizing is gone! If a hundred grand tax-free isn’t enough to stay solvent there isn’t a thing any politician can do to help you.

7 ways your taxes should be lowered. Tax humor might be funny, but also illustrates how taxes must be lowered. Find tax tips and deduction for individuals, the self-employed and small businesses. #wealthyaccountant #politics #president #taxplan #taxhumor #deductions #smallbusinessAs for tax brackets, people like the idea of a flat tax. I propose two brackets so my peers at least have an outside chance of staying in business: 20% and 50%. After the standard deduction, the next $400,000 is taxed at a flat 20%. All income above this level is nailed at a 50% rate with nary a deduction available to reduce the tax.

I hear the howls of protest, my tax obsessed readers. You think President Accountant will bankrupt the nation with such a plan. Au contraire. To pay for this simple tax plan all the welfare tax credits are nixed. The Earned Income Credit: gone. The Child Tax Credit: gone. Savers Credit: nope. Education credits: huh? No, no, and no. No more handouts on the tax return. Let’s turn the tax office back into a tax office and not an unpaid extension of the welfare department of the government.

Also, all income is taxed at the same rate. No more special rate for qualified dividends or long-term capital gains.

Poor people need not complain. The Earned Income Credit was designed to compensate low income workers with a kickback of their FICA taxes. In my tax plan every worker gets the first $20,000 FICA tax free. If you work you get an instant EIC on your paycheck.

HOWEVER. . .

Social Security taxes now are like the Medicare portion of FICA: paid all the way to the sky. And FICA applies to ALL income: dividends, interest, capital gains (long- and short-term) and more. A sports star gets a $20 million bonus. Good for everybody! A CEO of a public company enjoys a windfall of stock options? Good for everybody. The Social Security and Medicare financial problems are solved.

If you think about it (I have) the reduction in tax credits more than offsets the massive standard deduction increase. We may have to institute another round of tax cuts or risk paying off the national debt.

I see fear in the eyes of business owners. Don’t worry. I thought about you guys, too.

Business Taxes

This crazy new tax deduction for qualified business income is insane. All it does is increase complexity in the tax code, lining the pockets of tax professionals and attorneys practicing in tax law. In my plan the QBI is gone.

WAIT!

Don’t shoot! I propose a better solution. Businesses will enjoy their own standard deduction of $1 million. That’s right, my Republican friends, every small business owners will enjoy their first million tax-free on top of their generous standard deduction.

Big business is sweating right now, worried I’ll fill the Treasury at their expense. No way! As a gift for funding my political campaign you get the same $1 million standard deduction, plus a flat tax rate of 15%. You heard that right. The Republican plan of 21% is still waaaaay too high to compete internationally. We will start at 15% and reduce the rate 1% per year until it hits 12%.

Oh, don’t be sad, my liberal friends. To pay for this tax cut we will cut corporate welfare the way we did for individuals. If you think welfare to people is costing taxpayers, you haven’t added up how many handouts are lining the pockets of super-rich corporate executives. Those handouts will be eliminated completely.

To prevent small businesses and the big guys from gaming the system, all businesses controlled by a group only get one $1 million dollar business standard deduction only. In other words, you only get one million dollar deduction per investor. (And you guys thought I didn’t give this adequate thought.)

Tax System

The U.S. is one of only a few remaining nations taxing on a worldwide system. My plan brings us in line with the world by switching to a territorial tax system, where only profits from inside the U.S. are taxed. The tax rate for profits outside the U.S. is 0%, giving a major competitive advantage to American companies operating abroad, something they have to dance around now to compete with other nations. That alone could resolve half the trade deficit.

Americans working abroad would not be taxed unless they earned the money in the U.S. The Foreign Income Exclusion would be obsolete with President Accountant.

To prevent games, corporations could not shift profits outside the country. Strong measures will be in place to avoid such a practice with a 10,000% penalty for offenders. (You’re getting an awesome deal. Don’t get greedy!)

Foreign companies that want to sell in the U.S. would also pay U.S. taxes for their profits earned in the U.S. (Where ya gonna get a fairer deal than that?)

Trade Wars

This is just plain stupid. Tariffs are a tax on your own people! I would open the door to trade with all tariffs eliminated. If other countries don’t follow suit, fine. They can tax their own people more. All the better for our economy.

Looking for a fair tax plan? Then I know the perfect guy to vote for! Taxes are a mess is desperate need of organization. #wealthyaccountant #taxplan #tax #taxes #taxhumor #funny #deductions #creditsThe U.S. and its businesses whine endlessly about free markets. Well, trade wars and tariffs are the exact opposite. Compete or go broke. Under President Accountant we will allow markets to decide the winners and losers.

The one issue we have a right to complain about is the theft of intellectual property. (I’m pointing at you, China.) Our current president has a point on trade issues with China and a few other countries. Policies that strip intellectual property from U.S businesses will be dealt with harshly. If it is determined (China is the worst offender here) that theft has taken place, the government of the country where the offending company resides must compensate for losses and prevent such theft. If the government of said country can’t regulate their own people that country is barred from selling any goods or services in the U.S. until they govern responsibly. No more stealing our stuff and using it to sell against our own hard-working business owners.

The details are more than I can publish right now, but trust me. It’ll be great! The best trade plan this country has ever seen.

Health Care

It is repugnant that the wealthiest nation on the planet can’t provide basic medical care for all its people when other nations do just that. Therefore, I will sign an executive order my first day in office expanding Medicare to cover all U.S. citizens from Day 1 to Day End. No more Medical Premium mandate needed. If you want more than basic coverage; buy additional coverage. There is no additional deduction and businesses are not allowed to provide more health coverage to employees. Businesses are out of the health care business from now on (unless they are a medical business).

To pay for this basic benefit the Medicare portion of FICA will be increased 2%; half paid by the employee and half by the employer. All income, including dividends, capital gains and interest, will pay the additional FICA tax. And remember the FICA exemption above. Nobody gets hurt.

I hear my conservative friends complaining already. “We need to keep government out of our conversations with out doctor,” you say. I agree. Let’s keep your employer out of it, too. I for one am sick to death of telling my employees what kind of medical care they can get. Unless I’m a doctor or hospital, I’m out of the health care business and devoting all my time to my business, which is what I’m good at and the reason I started my business.

Minimum Wage

Is that grumbling I hear at the back of the room? No worries, my liberal friends. Under President Accountant the minimum wage will be abolished! You heard me right. Now holster your weapons.

The reason I’ll eliminate the minimum wage is because if we have a minimum wage to increase the number of jobs, then it stands to reason we must have a maximum wage to create more jobs. Don’t hear that argument too often, do you?

Eliminating the minimum wage will not put you at risk. Your favorite president will guarantee you see $15 per hour minimum on your paycheck each and every week. Rather than force companies to pay a minimum wage, there is a special tax for every hour any employee earn less than $15 an hour. That special tax is 20 times the amount your employee paid under $15 per hour.

I bet there will be no companies paying less the $15 an hour right quick.

Yes, businesses will be encouraged to automate with higher wages. But when has increased productivity been bad for a society? You get more for less. And with the new standard deduction and Medicare-for-all programs you will have a secure safety net.

There will be slightly fewer jobs, but they will pay better. Do I have your vote yet?

Under Cover

There is a lot to love by both sides of the aisle with my plans. Unless you are a tax professional you probably like my proposals.

It is unlikely I’ll actually be elected. Rumor has it a stark-raving mad crowd of accountants are approaching the Accountant farm as I write. With such a simple tax code with no loopholes, tax professionals are out of business. But then again, what did we produce? We manipulated a system created by man with no logical connection to reality. Very unproductive.

HUH!?

Was that gunfire?

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregations studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here. 

Easy is the Hardest Thing in the World if You Want to Be Rich

This moment was brought to you by hard times. Difficulties and challenges make you stronger. The only way to have an easy life is to embrace hard times. #easy #financialindependence #easystreet #success #motivationRichard Branson outlined in his autobiography, Finding My Virginity: The New Autobiography, 75 times he had close calls in his life. Recently he published number 76 on his blog. It seems strange for such a successful man to have had so many close calls. Branson has several successful businesses and a life most can only dream of. He is living the dream.

From the outside it always seems easier. I hear the same thing from readers. “You make it sound so easy, Keith.” To which I respond, “Then you haven’t been reading close enough.” Life has been anything but easy for me. Most people have difficult lives. It is these difficulties that define us. We either rise to the occasion and grow or wither and die. One path leads to a sense of accomplishment, the other pain and loss.

The challenges are endless. To outline a few highlights of my life’s plights: heart disease and a heart operation at age 13, shot in a hunting accident at age 13 which led to the discovery of my heart disease, numerous attempts at business ideas that failed, two daughters with serious medical conditions. Need I remind of the attempt to destroy my business only a decade after its inception? The attempt almost succeeded. Now might be a good time to repeat the millions of words I wrote and published over the years before I attracted even a modest following. No, kind readers, it was never easy.

Beg for Hard Times

From an early age, telling me “No!” was nearly a virtual guarantee I’d check it out. Don’t climb that haymow. Don’t walk to the creek alone. Don’t play with the vase! {crash} “Sorry.” And then the tears.

I was blessed (or cursed if you see things that way) with an insatiable curiosity. The only way to grow, to succeed, is to do what nobody wants you to do. And that means plenty of painful moments.

My dad wanted me to work in the family business working in agriculture. Our family has a long history in agriculture. I wanted something different. When I announced my intentions of going full-time in taxes and accounting my dad told a neighbor, “You won’t believe what my idiot son is going to do.” I have a great relationship with my parents, but that one hurt. The neighbor he told ended up an employee for two decades. (Clients: Remember Bev? She still comes in every year.)

Even people you love and trust will sometimes cause pain and make it harder. They mean well, but they don’t understand. Readers around here have stories to tell about their family’s reaction when they pursued early retirement and world travel. It’s never easy.

Burn the Ships

In 1519, Captain Hernan Cortez arrived in the New World at Veracruz. The first thing he did was order his men to burn the ships. Cortez knew his men would always hold back when retreat was an option. With nowhere to retreat, Cortez and his men pushed forward. What other option was there?

Early adulthood had me wondering what I was going to do with my life. Fortune (and frugality) allowed me to build a nice nest egg. If I watched my spending close I probably could have checked out in my early to mid 20s. That wasn’t my intention or goal.

Working in the family business wasn’t for me. I grew up on the family farm and had no intention of working in agriculture the rest of my life. (Now I live on a farm and have raised many animals. How times do change.) The family farm ended in bankruptcy the year I graduated from high school so the family business in ag repair was my only option. (It was the Rust Belt in 1982. There were few options.) For anyone looking for the easy road; I wasn’t on it.

Then I met Mrs. Accountant. If anything went according to plan, my relationship with the awesome and adorable Mrs. A was it! It’s about the only thing that went off without a hiccup. (Actually, if you get us in the corner we could share some stories. It would be inappropriate to share publically on a blog.)

Marriage also had challenges. Easy wasn’t in the lexicon. We worked hard to build a solid relationship.

The marriage process threw a massive wrench into the works. I was slumming when I met Mrs. A: enjoying loads of good books and a few college courses to round out my days. A good husband, the minister who married us said, needs to provide for his family. So I was hired as the janitor for the church.

Fourteen months later I quit to move full-time in my tax/accounting practice. I was young and foolish. Like Cortez, I burned the ships. I knew if I had an escape route I might take it. There could be no going back.

My client list was less than 50 when I started. Since I moved into town I left most of my regular clients behind. No problem, I thought. I know exactly how to get more clients. I quit my janitor job January 31, 1989. February 1st I was living the dream as a full-time business owner. I worked out of my home. What could be better?

Two and a half months later, on April 15th, I stared out my bay winder and thought, Oh, Sh{beep}! I didn’t exactly replace all the lost clients. To be exact, I had 48 clients and ~$3,000 in revenue. (I said revenue.)

Don’t tell me about easy. There was no easy in that moment. Looking back it seems foreordained. It was anything but! My nest egg was hit hard by startup expenses. The ships were burned. I HAD to move forward. My wife counted on me. To say I was nervous and worried would be an understatement.

Kick’em When they’re Up, Kick’em When They’re Down

You know how the story ends. I survived and even thrived. That’s why I’m here. That means my story is colored by survivor bias. The ones who didn’t make it aren’t talking to you on a blog about it.

Richard Branson had some really close calls in his life. I’m sure there are many more we don’t know of. Every business, every marriage, every relationship, every parent has stories to tell. After the fact it looks easy because all the while we are listening we know the endgame. In the warzone it was anything but clear how things would turn out.

There was no guarantee I would survive heart surgery in 1978. My cardiologist died of AIDS later. One nick of the glove and you’d be reading something else right now. I was a third of a millimeter away from a very short life.

Tempering make the iron stronger and more pliable. People, too. Difficulties and hard times give you the strength to grow. #success #motivation #life #lifelessons #personalfinance #freedom #growth #strengthThe hunting accident also put life in perspective. First, it saved my life by exposing my condition. Without that I would have died of a massive coronary sometime in my 20s, or at the latest, early 30s. It would’ve been just one of those things. Family would have spoken of the tragedy for years until I was all but forgotten. But I was shot. And if one of those pellets would have been a half inch deeper I would have died before anyone knew I had a medical problem. Luck does play a role.

Luck didn’t make me feel invincible; it made me feel vulnerable, like I was living on borrowed time. I tried everything. Burning the ships was a natural act. Prodding myself, forcing myself to move ahead was exactly the situation I set up.

Here is the secret: Every failure, every painful moment, drove my harder. My life appears easy because it has been so hard. I’ve been kicked and beaten unfairly and if you want a really painful story pull me to the side sometime when I’ve had a couple so my defenses are down. You’ll find out how easy it really was.

Zig Ziglar once said we should pray for hard times and difficulties. He understood. Ziglar went on to say hard times and difficulties make for an easy life and easy makes for a very, very hard life. The message was clear. Iron is brittle until you heat and hammer it. Fire and stress harden and strengthen the iron. With the right ingredients you get steel. But there is no chance for strong steel until you apply heat. It is the tempering which makes the metal strong.

And so it is with people. I know you have dreams. That is why you are here. Your goals of financial independence and/or early retirement need nurturing. Starting your dream business will not be easy. I can tell you what to do and it will not be enough. You will need to adjust, try different things, to succeed. Frugality is challenging. An awesome marriage is work. Some days it doesn’t work. Then you try something else and if that doesn’t work you try something else, and on and until you win.

In relationships it is easier. The endless effort is noticed by all parties involved. It makes a difference. My marriage isn’t great because I’m so good. No. My marriage to Mrs. A is awesome because I never stopped trying to make our marriage more alive. Mrs. A and I work daily on our relationship. Even when we don’t feel like it. (That happens, too, even in solid marriages.)

You will get kicked and hard. Thank God for that! If you never took a groin shot you would never grow. I know from experience I grew and learned the least when things were humming along. It was the challenges that strengthened me. All the idiots of the world who attempted to tear me down made me the success I am today. Don’t stop hating me now. I’ve got new heights to climb.

Pray for the same. Pray for money problems so you can learn really money lessons; pray for marital problems so you can appreciate your significant other and build a more solid foundation; pray for a bad economy and job loss; pray for bad weather. Pray to whatever god you believe in and ask for hard times.

It’s the only way to have an easy life.

 

 

More Wealth Building Resources

Personal Capital is an incredible tool to manage all your investments in one place. You can watch your net worth grow as you reach toward financial independence and beyond. Did I mention Personal Capital is free?

Side Hustle Selling tradelines yields a high return compared to time invested, as much as $1,000 per hour. The tradeline company I use is Tradeline Supply Company. Let Darren know you are from The Wealthy Accountant. Call 888-844-8910, email Darren@TradelineSupply.com or read my review.

Medi-Share is a low cost way to manage health care costs. As health insurance premiums continue to sky rocket, there is an alternative preserving the wealth of families all over America. Here is my review of Medi-Share and additional resources to bring health care under control in your household.

QuickBooks is a daily part of life in my office. Managing a business requires accurate books without wasting time. QuickBooks is an excellent tool for managing your business, rental properties, side hustle and personal finances.

A cost segregation study can save $100,000 for income property owners. Here is my review of how cost segregation studies work and how to get one yourself.

Worthy Financial offers a flat 5% on their investment. You can read my review here.