• The large number of new programs for small businesses is causing choice overload.
  • Tax professionals and small business owners are confused by the conflicting guidance from the IRS.
  • The Employee Retention Credit (ERC) could be worth more to a small business owner than a Payroll Protection Program (PPP) loan.
  • Business owners are focusing on the forgivable PPP loans and forgetting about the possible better value in the ERC where you do not need SBA approval.
  • Time is running out for small business owners to make a choice before some benefits are lost forever.

 

In 1970 Alvin Toffler introduced us to the concept of overchoice in his book Future Shock, where many people freeze instead of taking action when offered too many choices. Choice overload has been studied extensively over the past decade with the evidence overwhelming that more choices does not lead to better results. Rather, too many choices makes people less happy. And worse, causes many to do nothing even when any action would be preferable to doing nothing at all. 

Too many choices can cause you to make the worst choice of all: doing nothing.

While choice overload is a common discussion in investing circles, overchoice is rearing its ugly head again with the CARES Act and other stimulus measures to deal with the pandemic. Seasoned tax professionals are challenged by the new programs and the IRS and Treasury Department have been less than helpful in their guidance, changing the rules time and again. 

Overwhelmed small business owners and tax professionals stunned into inaction need to snap out of it fast. Many of these programs have an expiration date. Businesses need to access these resources while they can — even if they don’t have a current need — so the funds are available when they are needed later in the year.

This article will focus on the Employee Retention Credit (ERC) and how it relates to other stimulus programs. Unlike the PPP where loan forgiveness is based upon set factors, the ERC is a tax-free credit that never has to be paid back. 

Business owners are focusing on the forgivable PPP loans and forgetting about the real value in the ERC, where you do not need SBA approval. Just because you qualify for a PPP loan does not mean it is the best course of action. Some business owners may want to return the PPP loan in favor of the ERC. 

 

Qualifying for the ERC

The best way to determine if the ERC is a better option for your business we will need to review the details of the ERC program and then compare those details to various features of the PPP.

Here are the general facts of the ERC:

  1. The ERC is a refundable tax credit of 50% of the first $10,000 of wages per employee, including health insurance benefits paid by the employer. The maximum credit is $5,000 per employee. Wages after March 12, 2020 to December 31, 2020 qualify.
  2. The ERC applies to any qualified business in operation in 2020. For the ERC, the business must have had full or partial suspension of operations at any time during 2020 or Point #3 below. This is probably an easy hurdle to jump because current IRS guidance states that limited group meetings or travel would satisfy this requirement and most states have limited these activities.
  3. A qualified business must experience a greater than 50% decrease in gross receipts unless the business qualifies under Point #2 above. The ERC starts the first quarter of 2020 that gross receipts are below 50% of the 2019 gross receipts for the same quarter and continues until gross receipts are greater than 80% of the 2019 gross receipts of the same quarter, or until the end of the fourth quarter of 2020, whichever comes sooner.
  4. For employers with an average of 100 or fewer full-time employees in 2019, qualifying wages are all wages paid as outlines in Point 1 and 3 above and 5 below. If the employer has an average of more than 100 full-time employees in 2019 the credit is limited to wages paid to employees while not working. Wages must be no more than the equivalent amount paid the 30 days prior to the suspension or reduction of services. Full-time employees are defined as employees who average 30 or more hours per week or average 130 or more hours per month.
  5. Employer paid health insurance premiums not included in employee’s income are included in qualified wages.
  6. The ERC is taken on Form 941 starting with the second quarter of 2020. The IRS, as of this writing, has not issued an updated Form 941 to reflect this credit. You can check here for the most current Form 941.
  7. The credit reduces the employer’s payroll taxes to zero before becoming refundable. 
  8. Any credit over the payroll taxes reported on Form 941 are refundable. 
  9. Employers can apply for an advance refund of the ERC, sick and family leave credits on Form 7200. 
  10. An employer needs to decide between a PPP loan and the ERC, as both are not allowed for the same employer.
  11. Sick and family leave credits are allowed along with the ERC, but not on the same wages.
  12. The ERC does not cover self-employed income (sole proprietors filing on Schedule C). However, wages paid to employees of a sole proprietor do count, except for related individuals. Wages paid to employees of a partnership qualify (except for related individuals again), but not guaranteed payments to partners. Wages to owners of regular corporations and S corporations with a direct or indirect ownership of greater than 50% do not count. Household employees also do not count for the ERC.
  13. The ERC is not included in income for the employer or employee.
  14. However, the IRS currently states that the amount of the ERC reduces the amount of the employer’s deduction allowed by a similar amount. Note: This matter is not settled as Congress may change this requirement and some tax professionals disagree with the IRS’ position. If Congress does not act, expect this issue to be litigated in Tax Court.

 

The coffee house, the perfect gathering place to share good times with friends.

 

Maximizing the ERC Benefit

In most cases the PPP will be a better option for the small business. However, there are a variety of issues where the ERC is either the only choice or the preferred choice. In my office I consult with a large number of business owners. In nearly all cases the result was that the PPP was the preferred route when available.

Under the PPP the owner’s wages are included. This is a significant advantage. Under the ERC owner’s wages are specifically excluded, along with wages paid to related individuals. 

Another serious issue with the ERC is determining if gross receipts are less than 50% of 2019 gross receipts of the same quarter. Early in 2020 gross receipts were probably little changed. If businesses reopen this test could be failed for future quarters as well. IRS guidance says we can claim the ERC if we later discover we would have qualified by filing an amended Form 941. However, a business should know their gross receipts shortly after a quarter end so the ERC should be taken as soon as it is determined you qualify.

But is there a claw back if the economy (and your business) have a spectacular comeback later in 2020? Not really. Once your gross receipts exceed 80% of 2019 gross receipts you no longer qualify for the ERC. Therefore, once business activity exceeds the threshold you should no longer claim the ERC.

PPP loans are forgivable in whole or in part. When consulting with clients I found that if wages would reach at least half of the PPP loan, the PPP loan was superior to the ERC. Since wages of owners are included with PPP loans it is much easier to allocate the entire loan to wages. 

If the PPP is superior to the ERC, who should use the ERC?

If you have been denied a PPP loan your next course of action is to determine if you can still get some refundable credits with the ERC. 

Another possibility where the ERC is better than the PPP is when the small business has a lot of part-time employees. Since the ERC is 50% of wages up to $10,000 — the maximum credit is $5,000 per employee — there are situations where the ERC provides a better result than a PPP loan when many part-time employees are involved. Therefore, if you have a lot of part-time employees with low wages the ERC could be the better option. The only way to determine if the ERC is better is to put a pencil to paper for your specific situation. Be aware you still need to qualify for the ERC as stated above, such as a required full or partial shutdown at any time during 2020 and gross receipts less than 50% during at least one quarter of 2020 over the same quarter of 2019.

I suspect IRS guidance will soften on many of the issues surrounding the PPP and ERC. Businesses already struggling would fail in large numbers if the IRS takes a hard line approach. I doubt Congress would tolerate such action. 

A large number of business owners have avoided the many benefits the government has offered in these trying times. The large number of choices has led to a perfect example of people’s behavior when confronted with too many choices. Even tax professionals are struggling to understanding all the different programs. Alvin Toffler’s overchoice is clearly hampering small business owners. Too many options reduces the number of businesses that will apply for any, even if they qualify. That is the biggest risk facing the American economy in 2020. If business owners shy away from programs designed to help them through these unique times more will fail, costing jobs and long-term damage to the economy and harming America’s competitiveness. 

I encourage you to discuss your situation with a competent tax professional. Yes, the IRS is still playing with the rules because they haven’t figured it all out yet themselves. But you can still plan accordingly. Whether a PPP loan or the Employee Retention Credit is best for you, you owe it to your employees, community and yourself to explore all the options.

 

More Wealth Building Resources

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

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?

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.

 

Open for business.

The Coronavirus Aid, Relief, and Economic Security Act (CARES Act) is the attempt by Congress to reduce the economic dislocation caused by the current pandemic. Taxes play a key role in the Act, along with several economic stimulus policies. 

Normally a new tax law requires time to figure out all the details. The Tax Cuts and Jobs Act (TCJA) of 2017 is still looking for clarifications on several issues, some of which are addressed in the CARES Act. COVID-19 had pushed economic decline into overdrive. The American economy has never declined at such a pace. Businesses and individuals went from good economic conditions to millions unemployed and many businesses forced to close. A draconian stimulus package was required.

The CARES Act is $2.2 trillion of federal stimulus. With no time to iron out the details, rumors are flying. Normally reputable sources of information are struggling to get facts out. Misinformation is rampant. This post, along with the accompanying Facebook Live event, will outline the facts as they currently stand. The facts might change is some situations. I will correct those errors in this post periodically so you have a reliable resource.  There are many instances where the only answer is: I don’t know. Because nobody does, even the people in charge of the programs. 

I broke this post into sections covering several of the most important points of the CARES Act. While I might touch on issues in the Family and Medical Leave Act (FMLA), it is not the focus of this post. This post has many links to reputable sources. Use them, as they will contain additional updated information.

Discussion on the CV, market turmoil, fear and oil prices.

Posted by The Wealthy Accountant on Saturday, April 4, 2020

 

Stimulus Checks for Individuals

A refundable tax credit is provided by the Act of $1,200 for individuals ($2,400 for joint returns). There is an additional $500 rebate for each child under age 17. 

There is a lot of confusion around who gets the recovery rebate and how much. 

  • First, Social Security recipients also get the rebate. The Treasury Department and the IRS got this wrong when they stated these people must file a tax return to get the rebate. The Act made it clear this was not required and after much drama the Treasury Department changed its positions; a tax return is not required.
  • Second, the rebate is not taxable income.
  • Third, the IRS will direct deposit the rebate into your bank account if you used direct deposit on your last tax return or Social Security check. Everyone else will get a check in the mail.
  • Fourth, direct deposit payments will begin the week of April 13th and continue until all who qualify get their payment. Checks will be mailed starting in mid-May and continue until all are issued. The IRS will use information from your 2019 tax return to determine if you qualify for a rebate (see details below). If you did not file your 2019 tax return, the IRS will use your 2018 return. If you file neither year, the IRS will issue the rebate once you file your 2019 return anytime during 2020. If you do not need to file a 2018 or 2019 return you can file a 2020 tax return where the rebate will be issued then if you qualify.
  • Fifth, the rebate is on the 2020 tax return to be filed in the Spring of 2021. The rebate is a refundable credit (you get the rebate even if you have no tax liability). If the IRS screws up and overpays you, you don’t have to pay back the over-payment. If the IRS underpays you, you get the remaining amount with your 2020 tax return.
  • Sixth, there is an issue involving children that might be rectified in a future bill from Congress. Children 17 and older and in college or school are still usually claimed on the parent’s return. The parent gets nothing (children under 17 are an additional $500 to the parent, $0 for those 17 and older) even if the child is in school or college, but if the child files their own return — and not claimed on the parent’s return — the child would get $1,200. There are several problems here. Technically, there are no dependents on a tax return since the TCJA. However, similar rules are still followed for education credits and the Child Tax Credit (CTC). It isn’t as simple as removing a child from the parent’s return. The child has to disclose on their return they are a Dependent of Another when they file. If the parent is providing more than 50% of their support the child cannot claim themselves. It is vital to review all the support rules. If your child provides more than half of her support they can claim themselves and probably qualify for a rebate. 
  • Seventh, if you owe back taxes you will still receive the rebate. The only exception to receiving the rebate is if you owe back child support. Back child support is first paid before any rebate is sent to you.

The rebate is based upon your adjusted gross income (AGI). Single taxpayers get the full $1,200 rebate up to an AGI of $75,000 ($112,500 for head of household; $150,000 AGI for joint filers) The rebate is reduced by $50 for every $1,000 of AGI above the threshold (the CARES Act actually says a 5% reduction for AGI above the threshold) until it is reduced to zero at $99,000 for single taxpayers without children ($198,000 for joint returns without children). The complete phaseout of the rebate is higher if you have a qualified child as the rebate is reduced $50 per $1,000 over the threshold, meaning you can have a higher AGI with children and still get a small rebate

Planning tip! While caution must be advised when it comes to not claiming a child in college when the child does not provide more than half of their own support, there is an opportunity for high incomers to plan their rebate.

If your income is over the phaseout level for 2019 — but not 2018 — it might be advantageous to wait until you get your rebate before filing your 2019 tax return. if the opposite is true (2019 income is under the threshold and 2018 is above) you want to file your 2019 tax return as soon as possible. The IRS will issue your rebate anytime during 2020 once a tax return is filed if one (2018 or 2019) was not previously filed or additional rebate is allowed. If both 2018 and 2019 are over the threshold you have one more chance to get the rebate. If your 2020 income is below the limit the unpaid rebate you qualify for will be added to the 2020 return.

Remember, if the IRS sends too much you do not have to repay it. 

Here is a calculator to estimate how much you can expect in your rebate check.

 

Tax Return and Estimated Payment Due Dates

This section is not in the CARES Act.

The Treasury Department extended tax season for 2019 tax returns until July 15, 2020. That means 2019 tax returns are now due July 15, 2020. Any balance due is due at that time without additional penalty or interest. Estimated tax payments are also due July 15th. That means the April 15th and June 15th estimated payments can be made as one lump-sum by July 15th without interest or penalty. 

 

Charitable Contributions

Prior to the TCJA the maximum deduction allowed for cash charitable contributions for individuals was limited to 50% of AGI. The TCJA increased this to 60%. The CARES Act increases this limit again to 100% for tax years beginning after December 31, 2019. In all cases, the excess charitable contribution is carried forward up to 5 years.

Corporations (regular corporations, not S corporations) move from 10% to 25% of taxable income as the deductible limit for charitable contributions, with the remainder carried forward up to 5 years.

The CARES Act also allows up to a $300 cash charitable contribution deduction above-the-line (if you do not itemize) for individuals. The $300 above-the-line deduction excludes donor advised funds.

 

Student Loans

Federal student loan interest and principle are suspended for 6 months, from March 16 through September 30, 2020. Private loans no not count! There are several exceptions. All Stafford loans, PLUS loans for educational costs (instead of for tuition), consolidation loans under FFEL and Perkins loans.

Suspended payments will not hurt your credit. Interest will not accrue during this time either. Automatic payments are cancelled. To make a payment anyway, it will need to be done manually. Payments during the suspended period are applied to already accrued interest first and then principle. If financially able, making student loan payments on federal loans will pay down the loan faster as interest is not accruing for 6 months.

There is also a provision for employers to pay up to $5,250 annually of an employee’s student loans tax-free. This provision applies to payments made from March 28, 2020 to December 31, 2021. This cap includes other employer provided educational assistance. This might be a powerful tool to reward employees for 2020 and 2021.

Note: Some of the student loan material came from sources I trusted mostly. However, I was unable to verify all the material. I will update soon when I can verify this information with certainty..

 

Unemployment Benefits

For those impacted by COVID-19, funding has been provided for unemployment benefits, even if you exhausted state unemployment benefits or normally do not qualify for state benefits (self-employed, excluded members of a small business, etc.) These benefits run from January 27, 2020 to December 31, 2020.

There is also an additional $600 per week for up to 4 months, along with state benefits. Once state benefits expire, an additional 13 weeks of unemployment benefits are funded by the federal government.

All unemployment benefits are managed through your state’s unemployment office. My office has heard from clients some states are not up to speed on this yet. It may take persistence to get all the benefits you qualify for.

 

Required Minimum Distribution

The required minimum distribution (RMD) are waived for 2020.

 

Retirement Plan Distributions

Retirement plan distributions prior to age 59 1/2 face a 10% penalty in addition to the income taxes on the income. The CARES Act allows individuals to take a distribution of up to $100,000 from a qualified plan without the 10% penalty. The income tax on the distribution is still subject to income tax, but can be paid 1/3 each year starting in 2020. If the distribution is coronavirus related the distribution can be repaid to an eligible retirement plan within three years to avoid the income tax on the distribution as well.

Some states also have an early retirement plan distribution penalty (i.e. Wisconsin). The state penalty usually reflects the federal penalty. However, each state may treat this differently. Many problems can exists if the state of your residence does not follow federal law. For example: Your state may subject distributions to income tax in the current year. Later repayments to a qualified plan might be treated as an excess contribution on the state level. It is vital you discuss these issues with a competent tax professional before using this provision of the CARES Act. There are many considerations from a state tax standpoint beyond the federal CARES Act.

 

SBA Economic Injury Disaster Loan Grants

Small businesses have many tools from the CARES Act to deal with financial problems stemming from the coronavirus. My office was inundated with calls about the $10,000 grant provided to all businesses. Actually, this is technically a loan grant that is forgiven and is not added to income when it is forgiven.

Clients calling about this are right. Most small businesses will qualify (I think). The question is: How long will it take for money to arrive? Your guess is as good as mine. I think it is a good idea for all businesses to file an online application found here

Will everyone who applies get $10,000? Probably not. But many, even most, probably will.

The $10,000 is really “up to” $10,000 and treated as an advance. So don’t start spending before the check arrives. It could be weeks or months before funds arrive.

 

Delayed Payment of Employment Taxes

Employers can delay payment of the employer’s portion of the Social Security payroll tax. This does not apply to the Medicare portion of the payroll tax. 

As a recap: Employees have 6.2% withheld from their wages up to the cap for that particular year. The employer forwards this to the government, along with another 6.2% as the employer’s share of the payroll tax. It is the employer’s portion only that can enjoy a delayed payment. All of the employer’s Social Security portion of the payroll tax from March 12, 2020 to January 1, 2021 can be delayed. Half (50%) is due December 31, 2021 and the remainder by December 31, 2022. 

Self-employed individuals can take advantage of the same delay of payment for 6.2% of their self-employment tax. 

Note: If you receive any loan forgiveness under the CARES Act, including the Payroll Protection Loan Program, you are not allowed to delay tax payments under this provision.

 

Forgivable SBA Loans

Now we come to the elephant in the room. These so-called forgivable loans are shrouded in concerns. Just as the Treasury Department changed the rules on if Social Security recipients must file a tax return, the department changed the rules at least once on the terms of these loans to small businesses

These SBA loans are handled through your financial institution. As of Friday (April 3, 2020) some banks opened for applications. Here is a sample application. Many smaller banks are not ready to accept application. Bank of America in an email to my office outlined their procedures: notably, you must have a lending and deposit history with the bank. I have heard other large banks are easier to work with. 

Applications will start being accepted April 10th for independent contractors and the self-employed.

Payroll Protection Program Loans (PPP) have many details. Rather than make this post any longer, I will refer you to an excellent article in the National Law Review. We will use the National Law Review article in the Facebook Live. The video will be inserted into this post at the conclusion of the event. (See the video above.)

You should also review the SBA page on the topic. 

Here a few highlights to consider. These loan are not guaranteed forgiven! Too many people calling my office think this is guaranteed free money. It isn’t There are many rules to follow before they will forgive the loan.

  • First, employers can receive up to $10 million for 2.5 months of average payroll expense, including health benefits.
  • Second, this is in addition to the $10,000 advance Economic Disaster Injury Loan. 
  • Third, it only applies to businesses with 500 or fewer employees.
  • Fourth, the portion of the loan not forgiven must be repaid over a term no longer than 10 years at an interest rate of 4% or less.
  • Fifth, the amount forgiven is limited to payroll, mortgage interest, rent, and utilities paid or incurred over the 8 week period beginning with the loan origination date.
  • Sixth, if you lay off employees or reduce wages between February 15, 2020 and June 30, 2020, the amount of the loan forgiven is reduced proportionally. 

You are strongly urged to speak with your lending institution you intend to secure funding through for this program. You will need to provide additional information when you apply for the loan. This program is not as easy as the Economic Injury Disaster Loan Grants application. 

 

Additional Resources

In addition to the National Law Review article linked above, I strongly recommend the following resources:

CARES Act Summary by Foley (Pay special attention to the Employee Retention Credit not covered in this post.)

SBA Bridge Loans

SBA Paycheck Protection Program

SBA Disaster Loan Applications

Ward and Smith Review

Text of H.R. 748 known as the CARES Act (Caution: As a bill works through Congress many ideas are floated. Only the bill that became law counts. News reports frequently discuss items that “might” be in the final law. Again, read the final bill that became law for an understanding of the provisions.)

 

Stay safe, kind readers.

 


 

 

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.

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. 

Fear is the most powerful weapon in war. Hitler deployed buzz bombs against London in an attempt to destroy resolve and heighten fear during World War II. It nearly worked, if not for the even greater resolve of the British people and their leader, Winston Churchill. 

Fear is such a powerful weapon that nations will go to great lengths in war to manipulate the news reaching the people. During World War I, only Spain had a reliable free press reporting the deadly flu ravaging troops and populations. No army wanted the world to know they were taking heavy causalities from what would later be called the Spanish Flu. Yet every nation, on the battlefield and at home, were taking a hard hit from the disease. The U.S. was particularly hard hit. But when the absence of daily news on the deadly flu was only to be found in Spain, it was felt it the virus originating there. The truth was far from it.

Today we are facing a similar, though less deadly, threat, and the disinformation machine is in high gear. This time the media seems to want fear cranked to the highest level.

 

Washing your hands with soapy water for 20 seconds or longer is the most effective way to prevent the spread of the flu virus, even better than hand sanitizers.

 

Since I have no formal medical training I will leave the medical advice to those qualified to give it. What I can do, as an accountant, is reveal the truth behind the never-ending statistics and how they have been manipulated to scare us at the highest level. COVID-19 is a serious health issue without a doubt. It spreads easy and fast with a heightened risk of death. These simple facts make it easy to scare people into clearing their savings account to stock up on toilet paper and other essentials. 

The level of fear has filled my email box from clients and readers worried about the state of affairs and how it will affect their finances. I have worked hard on social media to provide a steady voice in the whirlwind of conflicting data. It is time I issued a formalized response here to the elevated levels of fear people are experiencing and the risks people face with their investments and personal finances.

Understand, this post is not about specific advice: buy this, sell that. Rather, my goal is to help you control your emotions and control your response to fear mongering and market unrest. That is where real wealth creation finds a home. Buying the right investment does no good if you panic sell before value has been realized. Buying high to sell at a panic low is the surest path to poverty. With new feeds bloated with coronavirus articles it is easy to start thinking the world is about to end. I will show you below, nothing is further from the truth. This has happened before and we know how it ends. (SPOILER ALERT: It will pass and most people will be unharmed. Even the economic damage will be less than expected and will return to normal in a matter of time. It will later be determined that fear caused more damage than COVID-19 did.)

 

A Short History of Pandemics

Human history is filled with pandemics. Until modern times, diseases ran their course with little effective intervention from doctors. Illnesses ran their course and eventually died out. 

The common cold, flu and similar illnesses are also common throughout history. The 1918-19 Spanish Flu was a particularly nasty one. As many as 50 million people died. 

Things were different in 1918-19. World War I was coming to an end. Governments involved in The War to End All Wars kept the flu numbers a secret so as not to encourage the enemy or demoralize their soldiers in the field and the folks back home. Only the free press in Spain reported on the people getting sick and the number dying. That is why some thought it started in Spain, hence the Spanish Flu designation. (It didn’t. It probably started in northern China in 1917.) 

Pandemics of the past, even those from less than 100 years ago, had less economic impact than today. Supply chains now span the globe. Never before have businesses been so integrated and international in scope. Pandemics of the past killed and sickened people; COVID-19 is also wrecking havoc on the world economy.

Until recently, a nasty flu season was the only way anyone knew something was afoot. Modern medicine gives us a jump start on what to expect. We knew COVID-19 was headed our way because China alerted the world to the pending virus. SARS, the Swine Flu and the H1N1 variety of flu in 2009 are modern examples of pandemic scares. Most of these viruses never circumnavigated the globe, dying somewhere along the way.

And we come back to the Spanish Flu. Somewhere between 20 – 50 million people died from that flu. It came in three waves with the second being the worst. Then it just disappeared. Nobody knows exactly what happened, but the flu virus probably mutated again to a less deadly form. Doctors didn’t discover a cure, social distancing wasn’t a thing and unless you were sick in a hospital it was unlikely you were even quarantined.

The Spanish Flu did have one nasty trait that put it into the history books. Normally the seasonal flu kills the old, very young and those with a compromised immune system. The Spanish Flu killed adults in their prime; the people who usually get sick for a week or so at worst during flu season, but almost always recover. 

And that is the first problem with the fear surrounding COVID-19: it generally kills older people, similar to the normal seasonal flu. The very young are spared with only a few healthy adults susceptible. Those over age 60 are at most risk.

 

Unfounded Fears?

COVID-19 is a nasty flu bug for sure. It spreads very easy and has managed to circle the globe rather quickly. It also makes people very sick that normally only get mildly sick from the flu. Older people face a very high risk of death if they contract COVID-19.

The fears are not unfounded, but are exaggerated. The response has been way overblown compared to the risk profile of the disease. Let’s place this into perspective:

As of this writing, 7,158 have died with COVID-19. Read that last sentence very closely as it will be important in a bit. Here are the current numbers

No one is advocating clearing the roads due to the risks of driving. Many still smoke tobacco and eat an unhealthy diet that increases the risk of cancer, heart disease and stroke. Yet, one of the smallest risks of dying to-date is causing a panic.

HIV/AIDS caused fear, but no panic. All the mortality risks listed above are a concern, but not at a level that should be disruptive. So what is causing COVID-19 to create such disruptive panic?

First, when the seasonal flu is with us every year and tens of thousand die from it we adjust to the risk as a normal part of life. COVID-19 is new, novel. Novel in this case means people do not have a natural immunity to the virus yet. 

Second, COVID-19 spreads fast and very easy. People have not had time to adjust.

Third, people who normally do not die from the flu are. Not like the Spanish Flu, but an elevated percentage of healthy middle age people are dying from COVID-19. 

All three combined has caused rampant fear. New, fast and potentially deadly to people who normally do not fear the flu has generated panic. Then people extrapolate the numbers to the entire world population and get dizzy. Except it is a massive misrepresentation of the facts.

 

Misleading Numbers

News reports and press releases from world health organizations are very careful how they word their press releases. Mortality rates are extrapolated by the public from the fancy representation of the numbers, but the extrapolations are far from truth. 

People dying with COVID-19 are reportedly as high as 3.84%. When people read this they think it is the mortality rate. It isn’t.

Not everyone is tested for the virus. Those most ill are more likely to be tested and all people who are reported to have died with COVOD-19 have been tested. (Otherwise how would they know they died with the virus?) This leads to a misrepresentation. If only sick, or potentially sick, people are tested, the number that die from the virus is pulled from a population likely to have contracted the disease. That is like using a test from people likely to have cancer as a representation of the entire population’s cancer mortality risk. The mortality rate for COVID-19 is likely under 1% and even lower for the population at large. Only time will give us an exact, or close to exact, number. Using the data available, COVID-19 is more deadly that the seasonal flu most years, but not anywhere near as deadly as the Spanish Flu.

Another misleading statistic comes from the wording in news reports and press releases from health organizations. They are careful to say someone has died “with” COVID-19 rather than “from” or “because of” COVID-19. This is a serious reporting issue.

Think of it this way. If someone is healthy and contracts COVID-19 they might have mild or no symptoms. But if they die in a car accident before the virus is cleared from their body they died “with” COVID-19. The virus had nothing to do with the death, but is recorded as a disease that the person had when they died. 

It is not uncommon for someone to have several contributing factors to their death. Rarely, if ever, do we medically say someone dies of old age. Instead, we list a variety of ailments that contribute to the final cause of death. Cancer and pneumonia  are common causes of death in people over 80. The flu is also a big contributor. Somehow we can’t bring ourselves to say they just got old and died. We need a reason. And that can lead to problems at times like these.

This counting of every death where COVID-19 is present misrepresents the full facts. The patient may have died from other causes at the same relative time anyway. This happens when people get old, and COVID-19 strikes hard at the old, as do many flu strains. This misrepresentation allows for an inflation of the COVID-19 numbers which heightens public fears.

 

Emotions in Check

People at risk need to take precautions. Because young people can carry COVID-19 without getting seriously ill, it is important to take steps to prevent the virus from infecting older family members inadvertently. That is the real risk with COVID-19; the unknown causing fear.

It is proper to take a break from all but necessary gatherings. The economy will take a short-term hit. It is scary, but not as bad as the media would have us believe. Social media blows it up even worse that the traditional press. Shame on us!

In the modern world this means supply chains will be disrupted. Business will slow and some industries will be very hard hit. The stock market is predicting a doomsday scenario.  It isn’t that bad! For those who are patient and control their emotions, now and in the near future is a good time to increase equity holdings. Keep adding to your retirement plan at work. Dollar cost averaging only works if you keep the regular investments going when the market is down, too.

I know it looks bad right now. Not everyone will contract COVID-19. Most who do will only experience mild illness. The older you are the more important it is to seek medical attention as your mortality risk increases rapidly with age. 

The way the numbers are playing out the number of deaths from COVID-19 will be somewhat higher than a normal flu season. However, the fear it induces will keep more people at home and off the road. It is possible the fewer number of people who die in road accidents as a result may be more than all the deaths attributable to COVID-19. 

That would make this the first flu strain to reduce the number of deaths by a greater number from other causes than those who die from the virus. Technically, a negative death rate. Again, technically, all factors combined, it could be the least deadly flu strain since the invention of the automobile.

It’s all a matter of perspective.

 


 

 

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.

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. 

Guest posts are always difficult. Too often the material that crosses my desk is of very low quality or thinly disguised ads, usually both. I pass faster than a speeding bullet. 

Then there are people I know that I would love to have write a guest post. They are articulate and care about the reader. Unfortunately, they are also busy. However!!! Through good fortune I was able to convince one of these people to to write down her wisdom for you, kind readers.

Debbie Todd has followed this blog for a long time and is a recommended tax pro on the Find a Local Tax Pro page of this blog. Seeing Debbie work with clients on social media has left no doubt in my mind of her level of knowledge, experience and willingness to serve her clients at the highest level possible. 

This post started over a discussion on Facebook. Debbie left a comment and I said I would love to hear all the details about it, preferably as a guest post. It was a lot of work, but she complied. As a result, you get to pull back the curtain and see how things run in a smooth operating tax office that serves clients like royalty and how you can get the same results with your tax pro. I wish I always lived up to those high levels.

Be sure to read to the end. I will copy Debbie’s contact information from the Finding a Local Tax pro page to the end of this post, along with a link to a worksheet you can download. You want that worksheet!

Thank you for the post, Debbie. It will help readers and me alike.

 

Guest post: Debbie Todd of iCompass Compliance Solutions, LLC

 

SECRET INSIDER Bean-Counter Chat Alert – Earlier this year, the Wealthy Accountant and I chatted online about what CPAs and Enrolled Agents like to talk about — innovative ways to serve, educate — and yes, sometimes even boot our clients in their business behind — while keeping our sanity and a semblance of family balance.

I promised to share a couple of strategic tips and a tool I developed that transformed not only my own business, but also generated amazing results for my firm’s clients. Then unexpectedly, LIFE got in the way of delivering on that promise — until now.

I lost two long-term step-parents within 3 months and then both my brothers had major cardiac events. Experiencing sudden and profound change, loss and grief sure puts things in perspective. Not an excuse — but I hope you can relate. Life throws unexpected curve balls which get in the way of best laid plans for your business, your personal life and even your legacy. Decisions matter! Adjust, breathe and take the next step. And the next…

Just as Summer gave way to Fall — and now as our lungs are filled with the brisk air of Winter — know that Spring 2020 is just around the corner. A new season, a new decade and untapped new opportunities await.

Read on to learn how…

 

David or Goliath – What Mattered Most?

The log in the fire is crackling, casting a rosy glow of warmth on the stockings, the twinkling tree and the ribbon-wrapped presents… 

As happens so often during the holiday season, I spend time reflecting on what worked well (and didn’t) with my beloved clients. I muse on the opportunities and challenges they faced in growing their business this year, adapting to new tax rules, employee issues, as well as several experiencing traumatic family events, which suddenly altered some of their best-laid plans.

What tips and tools could I share to allow them to be more successful in 2020 and beyond? I’m their CPA, their trusted financial coach and I take that privilege seriously. So do most of my amazing bean-counter friends.

Whether you are a large international company, a locally owned small business entrepreneur or a trendy global digital nomad, having rock-solid business goals and smart financial processes behind you is critical for your success. It’s not your size — it’s your heart, purpose and willingness to take action. Like David. . . 

Let’s face it, you’re toast without it… and often sooner rather than later.

 

Seizing a New Decade of Opportunities

As I gaze thoughtfully into the log’s dancing flames and scratch our aging Labrador’s graying ears, I realize that in just a matter of days, we will usher in a brand new decade…and brand new opportunities.

With last year’s tax law changes, a plethora of retirement planning opportunities (the SECURE Act, for example), combined with continuing economic growth, this reflection seems more weighty, more impactful and infinitely more exciting than prior years.

So, as a seasoned tax and financial strategy practitioner, I regularly share updates on these opportunities with my clients via email and during our quarterly meetings — but, how do we address (get to know) new businesses who want to join our cherished client family?

 

Communications and our Beloved NCO Triage

Like the log’s embers keep the fire going, providing both light and warmth, having a foundation of trust, clearly stated goals and objectives fueled by open communication, regular review and adjustments — translates to success on both sides of our client relationships.

Think about when you go to the doctor or the emergency room. You want the professionals taking care of you to listen and understand what is going on with you so you can get the correct diagnosis and treatment, right? Well the same holds true for your business or family financial health.

Over the last several years, I have developed what we call our NCO Triage, or New Client Onboarding Triage. It has blossomed to over 7 pages – and NO, this is NOT like your tax organizer. It’s a strategic financial life goals framework that helps me help you turn your dreams from vision into reality.

Yes, it asks questions about your business like what kind it is, what state(s) you operate in, your revenues, status of tax filings, who does what in the finance functions, etc, but also covers key details like a SWOT analysis (strengths, weaknesses, opportunities and threats).

Next, we learn about your life goals… not just for your business, but how your business fuels your life’s passions and dreams. 1, 3, 5, 10 and even 20 years. After all, that IS why you are working, right? Finally, we discuss your communication styles and preferences so we are both comfortable with how we will play together going forward. Ninety-five percent of preventable challenges stem from miscommunication.

So, WHY is this Important?

Keeping an eye on the fire is important. Left unattended, the fire eventually dies out and the cold will seep in. A few strategically placed money tips will keep your financial fireplace warm and toasty.

As stated earlier and without sounding too cheeky (okay maybe just a little) — your cash flows, financial foundations and habits are the lifeblood of your business. Your goals and vision sets the heartbeat and pace with which you operate. Slow and steady wins the race.

Wanna know something cool? Meeting with your CPA or EA can actually be FUN! Seriously…

I just wrapped up Q4-2019 meetings with many of my clients. Most calls start out something like this… ”Hey Deb, I’d like to meet with you for an hour this time. Let’s talk about our financials and the tax items for the first 30 minutes or so. Then I have a couple of ideas I want to run by you, so put on your counselor hat for the rest of the call, OK??” What an honor to help them explore possibilities that will improve their lives. After all, wouldn’t you rather be helping transform your client’s future with smart financial tips and tools as opposed to simply fixing and filing their historical transactions? Seriously, I get just as jazzed up as they do — and LOVE to see their dreams become reality.

 

Key Takeaways and Next Steps for Caring Pros and Smart Clients

Mylie, our Lab, is looking at me with that “Mom, it’s time for bed” look. I get up, turn the Christmas tree lights off and add an all-nighter log to the fire — so it will have energy to burn, keeping our house toasty warm while we sleep and dream.

Fellow Tax and Financial Pros — Key Thoughts AND A GIFT

  1. Proactive Planning with Forward Focus: Understand that your best value as a passionate and knowledgeable financial professional lies in proactively helping your clients achieve their dreams and life goals. Right, wrong or sideways, you can only fix and file past transactions. Instead, help your clients avoid those mistakes in the first place while providing tools to make their future dreams a reality. (Hint: Start on page 4 of the NCO!) Leverage this mindset into your practice’s core values and I believe you’ll both be happier as a result. 
  2. It’s NOT about the Money: This is a lesson I learned the hard way. Don’t compete strictly on price – EVER. Not everyone needs to be your client. Read that again. It took you YEARS of training, countless exams and ongoing research every single year to do what you do and do it well. It’s about VALUE: The amount of money I save clients each year far supersedes their invoice amount. Don’t sell yourself short – your knowledge is worth it.
  3. Equip Your Clients: Many clients are NOT money gurus – they are great artisans in their own field, but need your financial expertise so their business can thrive and grow. Offering monthly or quarterly meetings, a Q4 tuneup and emails of key tips are simple ways you can help your clients go to the next level. Plus, it provides a reasonable revenue stream outside of tax season!
  4. The GIFT: You can download a copy of my NCO and adapt it for your firm’s use. The fun part starts on page 4! Understand, I am NOT giving tax or legal advice and this document does not replace your well-crafted Engagement Letter or professional due diligence procedures. Use the following link:

2019 NCO – New Client Onboarding Triage Initial Questionnaire Template

Smart Clients Wanting to Up their Game (It’s OK if you read the Tax pros list above too)

  1. Identify Your Goals and Vision: As 2020 begins, what do you want to accomplish in the next year or the next decade? Seriously, a little dreaming and planning can make a HUGE difference! Feel free to download the last four pages of the NCO, dream and jot down your thoughts (crackling fire and aging Labrador optional, but highly recommended)!
  2. Plan With Your Tax/Money Pro: If you are not planning with your tax pro outside of annually filing your taxes, you are missing out on a golden opportunity to make small (or even large), consistent improvements to your financial bottom line throughout the entire year. Yes, you should pay them for these meetings too – unless they are already on retainer.
  3. Execute, Review, Adjust, Repeat: Dreams and vision are great, but it’s ACTION that wins the race…100% of the time. I’d rather see imperfect action (within legal bounds of course) than a perfectly procrastinated idea. As part of your meetings, you can set timelines, deliverables, checkpoints and get objective feedback and insights to adjust course, as needed. Then repeat!

I, for one, am truly excited about spending quality time with loved ones and enjoying Christmas – celebrating Jesus and all the wonders we have been blessed with – and those opportunities which await. [Editor’s note: Debbie delivered this to me December 23rd. Your lazy editor didn’t get to it until after the 1st of the year.]

Wishing each of you a joyous, happy and safe Christmas and New Year – AND a next decade that blesses your family and business beyond measure!

Debbie Todd

Your Friend in Financial Wellness, Debbie

 

 

 

 

 

 

 

Contact Information

iCompass Compliance Solutions, LLC, dba 1 Hour Impact Firm #5917

Locations we prefer to serve: SW WA or Portland, OR Area. WBE certified in both OR and WA

Contact: Easiest to reach me via email or https://www.facebook.com/TheSpunkyCPA/

Email: deborah.todd.cpa@gmail.com

Areas of practice: Federal and state personal and small biz taxes, Non-Profit – 990s, IRS compliance and remediation, divorce and estates, also small biz startup strategy. Niche expertise in small business interactions with State and Federal Government Contracting.

In person or fully digital capabilities.

Areas of practice you don’t handle: Ex-Pat, valuation disputes, M&A.

Bio: You can learn more here, including govt background- http://1hourimpact.com/about-us/

Interesting tidbit: Special passion for teaching smart early childhood financial literacy using engaging, interactive theater.

 

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?

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. 

On a sunny spring weekend in Seattle nearly five years ago I attended a conference. In the audience was Pete Adeney, aka, Mr. Money Mustache (MMM). 

MMM took to my message immediately, interrupting my presentation to inform me I was his new accountant. I took it in stride. My gift to gab exceeded my surprise.

What caught the ear of MMM was a strategy I have used for decades to save business clients money: the S corporation.

The beauty of the S corporation is that some of the profits flow through to the owner outside self employment or FICA taxes. At 15.3% for many, it is a meaningful savings.

Not everyone should use an S corporation (or LLC electing to be treated as such).  Side hustles frequently do not have enough profit to make it work. Profits under $30,000 are best left as a sole proprietorship or partnership, without consideration for legal and other matters. Between $30,000 and $50,000 it is time to start running the numbers and once profits exceed $50,000, and are likely to continue to do so, you need to get serious about an S corporation.

Many factors come into play. The previous paragraph is only a suggestion and not hard and fast tax advice. I have S corporations in my office with less than $30,000 in profits and businesses with over $50,000 in profits still waiting for the S corporation to benefit them.

That presentation in Seattle five years ago was the spur for me to start this blog and is one of my first posts. It also prompted MMM to publish on the topic as well

And now the advice is all wrong.

 

More than One Flavor of Corporation

Corporations come in two flavors: the regular, or C, corporation and the S corporation. Small businesses are familiar with the S corporation because it was designed for them. Profits flow to the owners because the S corporation rarely pays income taxes. 

Regular corporations are generally larger due to tax issues. Most stocks listed on U.S. exchanges are C corporations. 

Small business owners: deduct all your child care expenses. New tax laws have made it easier for owners to deduct personal tax-free benefits. #ICHRA #HRA #QSEHRA #Fringebenefits #employeebenefits #childcare #deductionsBoth flavors of corporation can be organized in one of two ways. The first is to organize as a corporation and the other is to organize an LLC and elect to be treated as a corporation for tax purposes. You can then elect S status, if desired.

The S corporation avoids double taxation on dividends paid out of profits. The drawback is that C corporations can provide more benefits to owners without restrictions. The dreaded “except for 2% shareholders” phrase in the tax code limits the advantages of the S corporation. In the past C corporations faced a higher income tax rate compared to tax rates for individuals. 

The Tax Cuts and Jobs Act of 2017 (TCJA) changed all that.

Regular corporations prior to the TCJA had a graduated tax rate on profits that started at 15% and climbed to 35%. C corporations now pay a flat 21% income tax rate. Individual tax rates (the rate profits from an S corporation are taxed at as they flow to the owners) top out at 37%.

Instead of profits flowing to the owners on a K-1 annually, a regular corporation pays taxes on its income and pays dividends from the remaining profits. The dividend can be qualified, but multiple additional issues abound with dividends paid from a closely held C corporation we will not be able to address in this post. (The link is to an old article from the AICPA which is still relevant today.)

C corporation dividends are NOT deductible by the corporation, but are taxable to the recipient, hence the double taxation since the corporation already paid income tax on the profits. The corporation paid income tax on the profits at 21% and the owners pay tax again at the rate for dividends (qualified or non-qualified). 

Up to this point it still looks like the S corporation is the way to go for virtually all small businesses and you would be right. However, for fringe benefit purposes, an S corporation is treated as a partnership, and a greater than 2% shareholder is treated as a partner rather than as an employee. To reiterate, this is for fringe benefit purposes only. And it makes all the difference.

 

No Simple Choices

S corporation owners still enjoys access to all the retirement plans of a regular corporation with some modifications. Health insurance premiums (IRC Secs. 105 and 106) are generally added to wages and then deducted on the personal return (Rev. Rul. 91-26). The same applies to group life insurance up to $50,000 (IRC Sec. 79) and meals and lodging for the employer’s convenience (IRC Sec. 119).

Get the most out of your tax-free fringe benefits as a small business owner. #fringebenefits #businessowner #smallbusiness #employeeawards #watch #ICHRA #QSEHRAThis is where the choice is less clear than in the past. The above fringe benefits still have value to the owner of an S corporation as long as a few hoops are jumped through. The benefits are available to C corporation owners as well, just with fewer hoops to jump through.

Numerous benefits available tax-free to employees do not apply to 2% shareholders of an S corporation. With the C corporation tax rate at a low 21% and dividends likely qualified (taxed on the personal return at the long-term capital gains (LTCG) rate), double taxes may no longer be the issue it once was. 

For some individuals, the LTCG tax rate can be 0%. This stops double taxation of dividends in its tracks. Even if dividends are taxed it is at the lower LTCG rate rather than at ordinary income rates. The top LTCG rate is currently 20%, however, there is a small (on percentage terms) additional tax on higher incomes that could push the effective LTCG rate to 23.9%.

But the benefits are the real prize. How many fringe benefits you give the owners will determine if the C corporation is better for you. Some of these benefits are massive, allowing for 5-figure deductions. Something you can’t do with an S corporation.

 

Deducting Fringe Benefits

We will touch on the most common and valuable fringe benefits you can deduct with a C corporation as an owner where it isn’t allowed as a 2% or greater shareholder in an S corporation in most cases.

 

Flexible Spending Account (FSA): This is the “use-it-or-lose-it” account you might be familiar with. Employees are allowed to withhold from their wages or salary up to $2,700 (for 2019) per year for medical expenses. If married, a spouse can do the same. 

The FSA does take planning. If the employer plan allows, up to $500 can be carried over to the next year OR up to a 2 1/2 month grace period allowed to use the money in the HSA. 

The FSA is a salary deferral; a deduction is not allowed since it is already excluded from income.

You can use FSA funds for uninsured health costs, such as: eyeglasses and exams or a gym membership or message therapy with a doctor’s prescription.

You can read more about the FSA here.

There is also a Dependent Care Flexible Spending Account (DCFSA) where employees can elect to exclude up to $5,000 from income for dependent care expenses. The employer can also provide some or all of this amount as a tax-free fringe benefit. FICA and FUTA are also avoided. 

There are several opportunities with a Dependent Care Assistance program (IRC Sec. 129) and a credit for employers covering qualified child care expenses (IRC Sec. 45F). You can read details here.

 

Deduct all your health insurance premiums and medical care costs tax-free. #healthinsurance #benefits #employee benefits #healthinsurancepremiums #medicalcosts #deductiblemedicalcosts Deductibleinsurance #HRA #QSEHRA #ICHRAHealth Reimbursement Accounts (HRA): This might be the number one reason a small business owner may choose the C over the S corporation. 

Once again we have two choices. The Qualified Small Employer Health Reimbursement Arrangement (QSEHRA) and the Individual Coverage Health Reimbursement Arrangement (ICHRA). The ICHRA is available starting January 1, 2020; the QSEHRA is currently available.

The QSEHRA allows a tax-free benefit to individuals of $5,150 and $10,450 for families in 2019 for medical expenses, including insurance premiums (though the Premium Tax Credit (PTC) is reduced by the amount of the benefit, if claimed). The employer pays this benefit. The employee has nothing to report on her return with the exception of the adjustment to the PTC.

The new ICHRA has no annual cap. Yes, you can deduct a lot under the ICHRA! There are some differences, however. If you receive any benefit under an ICHRA you cannot get any Premium Tax Credit. 

It should be noted that the QSEHRA and ICHRA are for employers without group health insurance. Employees with individual insurance is allowed and what these plans are designed for.

There are several considerations with HRAs. Here is a good chart comparing the two.

 

Employer Provided Vehicle: An S corporation can provide the same benefit, but it is cleaner and easier with a C corporation. The vehicle can be used by the employee for business or personal purposes and, depending on the facts and circumstances, may be tax-free to the employee.

There are a lot of moving parts to the employer provided vehicle. Discuss this option with your tax professional to determine if it is of value for you.

 

Employee Achievement Awards (EAA) (IRC Sec. 274(j): If you have a written plan it is a qualified plan. The qualified plan can offer awards up to $1,600; $400 if not a qualified plan.

The TCJA changed the rules a bit for the EAA. Cash and equivalents are not allowed: cash, gift cards, gift coupons, gift certificates, vacations, meals, lodging, event tickets, stocks, bonds or securities. Only arrangements that confer the right to select and receive tangible personal property (a watch or plaque, for example) from a limited assortment of items preselected or preapproved by the employer are allowed. (IRC Sec. 274(j)(3). The award must not appear as disguised compensation. There are additional limitations.

 

The Best Route

There are many more fringe benefits to consider. To keep this post brief I will punt on the other tax-free fringe benefits. It is recommended you review these issues with your tax professional as there are significant opportunities to reduce taxes with these strategies.

Now you need to determine if the S corporation is best for you. It boils down to the fringe benefits. The lower flat tax rate for C corporations are a consideration and your personal tax rate on dividends from your corporation will play a role, too.

However, the biggest determinant will be tax-free fringe benefits. And when it comes to benefits the HRA will top the list. Large deductions allowed with a C corporation can remove enough income from the taxable column to create an overall tax for the C corporation lower than the S corporation. It does take planning to determine this.

The QSEHRA is a powerful tool under the TCJA personal and corporate tax rates. The new ICHRA is something you must examine. With virtually unlimited deductions for health related expenses and insurance premiums, the ICHRA will make the C corporation more valuable to small business owners than ever before.

There is no shortcut. You have to put pencil to paper or have a tax professional do it for you. It might be worth paying a seasoned tax pro to help you determine the best route. Every step inserts additional tax considerations tax professional should be familiar with that a novice may not. Investing in your business can pay hansom rewards.

 

Caveats

Tax are never easy. All the good ideas in this post still need a warning label.

If you are an LLC electing to be treated as an S corporation you can elect at any time to become a regular corporation (terminate the S election). However, you cannot elect to be an S corporation for at least five years, even if circumstances (or the tax code) change.

Also, if you are a C corporation with accumulated earnings that elects S status your tax return becomes much more complicated and probably more expensive to prepare. There are additional risks for an S corporation that spent any time as a C corporation; you should discuss these potential issues with a tax professional. The risks could subject the S corporation to additional taxes. Get all the facts before jumping.

Finally, in 2025 the tax code reverts back to 2017 rules for individuals if Congress doesn’t act. Corporate changes were permanent. One more thing to consider before you make a decision.

 

A small business should hire a competent tax professional to deal with the considerations put forth in this post. Too many variables can intercede.

This post allows you to ask good questions of your tax professional. A small investment with the taxguy should pay you back in multitudes of order compared to the fee invoiced. 

Don’t accept the S corporation as the default for small businesses anymore. The C corporation might save you more money.

Print this post out and/or send a copy to your tax professional and ask if this is something that could benefit you. Pay the nice tax professional. She will earn her keep on this one and it is well worth it to you. 

 

 

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.

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. 

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. 

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. 

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.