Your CPA can’t save you a dime. You have to take action in order to make way more money & pay way less taxes. In this episode, Tom discusses how investors and business owners should best position themselves to utilize the skills of a CPA and other team members to build success.
01:16 – Find Out Why Your CPA Can’t Save You A Dime
02:48 – What Is A Good Plan Of Action?
10:21 – Why Is Documentation So Important?
16:37 – How Do Estimated Taxes Help You & Your CPA Improve Your Teamwork?
Tom Wheelwright: Welcome to The WealthAbility™ Show, where we're always learning how to make way more money and pay way less taxes. Hi, this is Tom Wheelwright, your host, founder, and CEO of WealthAbility™. You know, one thing that I have learned over the years is that your CPA, your tax advisor cannot save you a dime. It's your actions that create tax savings.
So today we're going to discuss how to take knowledge and turn it into action. Remember what I'm always saying. If you want to change your tax, you have to change your facts. Right? So it's not enough to get great tax planning, to read Tax-Free Wealth, you know, go to seminars. It's not enough. You can't even go to your tax advisor. If you go to your tax advisor and you go, “Okay, tell me what I need to do in this situation, tell me what I should do,” and then you don't do anything, nothing will happen. It may seem obvious, but I just know a lot of people that read a lot of books, okay? Sometimes I'm that person. And then we don't actually do anything with it. Right?
So this is why a number of years ago what we decided to do was we decided to stop doing tax planning. Tax planning doesn't really do anybody any good. And the reason is, is because it's just all we're doing is planning, we're not … What if we did this? What if we did that? What we switch to … And those of you who are clients of ours or have been and have gone through this process before understand that it's really a tax strategy. Okay? And the difference between planning and a strategy is that a strategy takes it a step further. It's a plan of action. That's the definition of strategy. A plan of action to accomplish a specific purpose. And that's why we do wealth strategies, we do tax strategies.
What I want to talk about today is actually what you have to do with that tax strategy. Because okay, you find a great CPA and you actually develop this plan of action. Right? So this plan of action's going to include what entities you need to have, it's going to include things like what you need to do to increase your deductions, it's going to include things like what documentation you need to do, it's going to include things like okay, what can you do to change something from ordinary income to capital gain, things that you can do with your family to reduce taxes by paying your kids or whatever, and even some tax free options like life insurance or like tax credits, things like that. And of course, in the end, it may include some deferral. Postponing taxes to a later year. Right?
So when we take these things that we've come up with, with this strategy, what do we do? What do we do? So the very first thing that … The first thing, of course, is develop a strategy. Number two is to develop the team because while you're the most important person on your team, the next most important person on your team is going to be your tax advisor. Great. There are other people you need on your team in order to put this plan of action into place. Right?
So for example, you're going to have to have an attorney, and that attorney is likely going to be either a transaction attorney or an asset protection attorney. Right? So make sure that you've got a good attorney on your team who understands who can deal with multiple states, because we understand that you're probably going to be in multiple states, and actually understands that they need to work with the rest of your team. Not all attorneys are good at that. Actually, very few CPAs are good at that. Attorneys tend to be better at it, in my experience, attorneys tend to be better at working with other team members than accountants do. Accountants tend to think they know it all. And so, you know, you have … But if you've got a good tax strategy that means you found a good tax advisor, you found somebody who will actually work with other people, and you start working with a team.
So, all right, so you're got you, your spouse or your partner, either personal partner or business partner or both, you've got your tax advisor, your CPA, you've got your attorney. Now there's some other people that may need to be involved at some point. A banker. Okay? So one of the things you're going to have to do when you set up new entities is you're going to have to set up bank accounts. Right? So who's going to do that for you? Having that relationship with a banker so that you can just call them … See the idea is that this should not take a lot of time. It takes some time on the planning side, it takes a lot, some of your time there, but actually putting it into place should be more a function of assigning it to team members and then getting them to report to you on what's going on.
So you're working with your attorney, you say your tax … Your CPA developed this diagram of what it needs to look like. Right? And so you send that to your attorney. The attorney says, “Okay, this looks good. Maybe we need an adjustment or two.” Talks to the CPA, gets back, make sure, okay, this works. And then the attorney actually puts it into place. Now what they're going to do, the attorney is, they're actually going to set up the entities. Right? They'll set them up.
Now, that doesn't mean that everything's done there with respect to those entities. First of all, they need a bank account. Every entity needs a bank account, so that means that what you need to do is you're going to have to have that banker … Or you're going to do it yourself. I mean, better to have a banker do it. Assign, again, ask that banker. Say, “Here's the bank accounts I need to get set up. Would you please get them set up? I'll sign whatever documents, get those back to me, and then we've got bank accounts. Some of them need to be checking accounts, some of them can be savings accounts. But at a minimum they each need to have a bank account in order for those entities to work properly.
All right, then we've got other things like documentation. Okay? You're going to be documenting your … Not only are you documenting, make sure that your attorney helps you document your entities, but you have to document whatever you're going to put into those entities. So you may need to transfer title. Right? So it's one thing that you've got the entity set up, but now you're got to transfer the title of assets into those entities. So again, this is where your attorney can help you. But my experience is, is that attorney's take direction. All right? They probably will not do it for you unless you ask them to do it. Right? Because they know that they're charging you fees and so they're a little sensitive to doing something for you that you haven't said, “I want you to do this.” So some of them will actually suggest you do it, my experience is a lot of them will not. So make sure that if you're putting assets into entities, make sure that you're transferring the title of those assets.
For example, you might have some real estate that needs to go into an entity. Well you need to actually do the title. Right? So you probably need … And in real estate, probably need to do a warranty deed. If you have a car, you may need to assign it. All right? If you have a business, right, then that may be a function of merely setting up the entity for it. Right? And running it under that business. But you may need to register with the Secretary of State. So these are things that you actually have … That actually have to get done.
I had an experience, very sad experience, a number of years ago with a … One of my very, very favorite clients. And he worked on this great estate plan with his estate planning attorney. Well, he'd never actually … He had this trust and it never actually transferred title of the assets into the trust. So it never got funded. Well, an unfunded trust is not worth … Doesn't do anything. Right? Because the whole point of a trust is to hold title when you die. Well, unexpectedly, he died. Very unexpectedly, very suddenly, he died. So his heirs included his girlfriend, who'd been a girlfriend for many, many years, his life partner, two ex-wives, and three children. So you can imagine what it was like with them trying to figure out okay, who gets what? Whereas if the title … If there'd been that follow through, and again, this is something he had to do. Right? Nobody could do it for him. If the title of those assets had actually been transferred into the trust, it would have been a piece of cake. There would have been no litigation, it would have … Well, probably no litigation. Because what he wanted to do was actually very fair to everybody. And it got ironed out, but it took two, three years and hundreds of thousands of dollars of legal fees and a lot of people's time and confusion and challenges.
So we want to make sure that happens. Right? We want to make sure we actually take that action. So for example, when it comes to documentation, now you can say … Well, I hear this all the time. I've got this great tax advisor, they handle everything. I'm going, “How is that possible? How does your tax advisor document your business expenses? They don't have access to your documentation. You only have access to that documentation.” If you go to dinner with somebody, how do they have access to that receipt? How do they know who it was with? You have to write that down. You have to keep track of that. You have to scan that in or have an assistant, somebody else, scan that in. But you're the one at dinner. Right? So somebody's got to take responsibility for that.
And the challenge that a lot of people have is nobody takes responsibility. Because you go, “Oh, I've got this great tax plan, I'm good.” Or, “My tax guy's doing this on my tax return.” Okay, so what happens when you get audited? Well, now you're scrambling. I don't have all these receipts, et cetera. There was an audit a few years ago, somebody I knew got audited. And this client had kept terrific documentation. I mean absolutely terrific documentation. They had every single receipt, it was noted, it was scanned in. So the auditor kept asking for more information. The CPA actually send them four three inch loose leaf binders full of information. 12 inches of documentation in total. And kept sending it to the auditor. Well, the auditor kept asking for more because what the auditor was saying was, “I don't know the law that well, but I'm sure to find something with the lack of documentation.” Because my guess is, is that this auditor that in the past he'd always found that to be the biggest issue. So the IRS, what they're looking at is do you have the documentation? If you don't have the documentation, you don't get the deduction. We don't care … The IRS is saying, “We don't care if it's a valid deduction otherwise. If you don't have the documentation, we are not going to allow it.”
Well they ended up, actually, getting a clean audit. Absolutely no change whatsoever even though there were actually … There was actually some … There were actually some things that probably should have been changed, but the audit supervisor looked at all this documentation and said, “Look, this is … I mean you asked for all this information and you got it. We're going to have to wrap this up.” And so they wrapped it up, literally three days after the meeting with the audit supervisor. Why? Because they had all the documentation.
Now, let me give you the opposite example. I had a young woman come to me a number of years ago and their accountant had not gone through this with them about documentation and had gone ahead and just done the return, had not required any documentation, had not taught the client how to do the documentation and then they got audited. So the auditor's going through this saying, “Where's the documentation?” And the auditor was doing a thorough job. Well, so she gets this big assessment. She's going, “Help, help. What do I do?” And a buddy of mine actually referred her to me and said, “Well can you help?” I said, “Well, we'll see what we can do.”
Well the challenge is, is that now we're like two, three years after the fact. Going back and finding all that documentation can be really, really challenging and we weren't able to do it. I mean we were not able … The client was not able to dig up this documentation that they had. And had it been done contemporaneously, in other words, when they actually had the expense, I think we would have won 90% of it. The documentation's important.
So one of the things we have to do on a daily basis is maintain that documentation. This is all a matter of how do we implement this plan of action? Right? And then there are things we actually have to do on a daily basis. For example, now you're looking for business deductions from … You know, you've got these new entities. Well, these new entities may need credit cards. Okay? Or you may need to use your personal credit card and submit for reimbursement every month. That's another way to do it. What we never do is we never use a business credit card for personal expenses. It's okay to use a personal credit card for business expenses as long as we get reimbursed. The easier way to do it is to use a business credit card for that business. So I have a bunch of credit cards.
I have a bunch of businesses. I have a bunch of different credit cards. And yes, that means you have to carry those credit cards with you. Now with some of the new things on phones, Apple Pay and so forth, you can actually put multiple credit cards in there. Right? So there are new ways to do this that you don't have to carry a bunch of plastic with you. But even so, I find it easier to actually use the credit card than to get reimbursed. It just takes too much of my time to get reimbursed, so I will actually go to a gas station that accepts the credit card and not go to a gas station that will only accept a debit card because I don't want to have to go get reimbursed for it. Right?
You know credit cards is another thing that we need to do. So what I'm just talking about is I'm just talking about just take the action. Right? You've got this plan of action, that's what this strategy is all about. The strategy is all about a plan of action. Unless we take the action, the plan is worthless. It's like I was talking to somebody yesterday about business plans. And they used to teach a class on doing business plans. They said it was so hard to get people to understand why this is so important. I said, “Well to me the challenge is, is that a business plan is not all that useful. But business planning or business strategy is very useful. Because then it converts into action. But it's the actual action that comes from the plan.
It's not … The creating the plan is a useful exercise, don't get me wrong. Just like creating the strategy is a useful action. To me the more important action is the actions you take after that plan of action is created. Here's another thing. Let's say you've got this great plan of action and then you don't pay your estimated taxes. Right? So if you're investing or you're a business owner, chances are you're not paying your taxes through withholding. You're going to pay through quarterly estimated taxes. So on a quarterly basis you need to actually send in a check to the government. Well what does that mean? That means you need to meet with your accountant at least for a phone call prior to that estimated payment due date. You need to know when the due dates are and you need to have an estimate of what your income is so that you can know how much tax to pay. Can you see that there's actions we have to take.
Now, here's what comes out of this, the great thing about having that conversation with your tax advisor is that what's going to come out of it is this will be a minimum contact point. Okay? Write that down. This will be a minimum contact point with your accountant, with your tax advisor. Because what'll happen is, is that you will then say … Your tax advisor should be asking you, “Okay, so what's going on?” Right? What's new, et cetera, because they need to know that in order to come up with that quarterly estimated payment. Well now you start telling them about, “Well, I'm investing in this, I'm doing this, I'm doing this,” and the next thing you know, the tax advisor's going to say, “Oh, well we can do this, this, and this.” Right? I find that all the time that when I make sure … I like talking to my clients on a monthly basis because what I find is, is we're having a conversation and something will come up. Literally, 100% of the time. I will be able to ask some questions and will go, “Okay, so tell me what's going on.” And then it triggers okay, now what about this, what about this, what about this? And then we can come up with more actions to take. Right? More things that can be done in order to reduce taxes and to relieve stress.
The reality is is that what causes the stress is the unknown. Right? What we don't know will happen. Well, once we have … Once we actually put things into place, once we actually take the action and we form the entities, we create the bank account, we have the credit cards, we put the insurance in place in the right places, we transfer title to the right entities for the right assets, I mean we start putting all of these ideas in place. Then it takes a lot of stress off because we know what our daily actions need to be.
I talk about the credit cards, well using those credit cards, that's just second nature to me. I'm just going oh, well this is … This expense goes to this company, so therefore we need to use this credit card. My assistant knows. She'll go, “Okay, well we don't have a credit card for a company.” She goes, “So where do you want me to put this?” And I go, “Well, obviously this goes on my personal credit card because it needs to be reimbursed. That's what has to happen. So that's okay, but it will need to be reimbursed.” So she knows now that this is what has to happen every single time. She's always asked me, “Who's paying for this?”
And that's the kind of … Those are the kind of habits that we want to get into. It's the habits … Once we implement the basics of the strategy with the entities and the title transfer and bank accounts, et cetera, now it becomes the habits. What are the good habits that we have that are going to reduce our taxes on a daily basis? Documentation, there's a good habit that we want to have. Thinking about taxes on any dollar that comes in or any dollar that goes out, that's a good habit. That's a mental or intellectual habit that we have to have. Once we have that habit, we go oh, wait a minute. I'm thinking … Let's say you're thinking of taking a vacation. Okay, well if you're thinking about, all right, what would have to happen in order for that vacation to become business travel, now you can make it a decision. Now you're aware, you're awake. Okay?
And you're not oblivious to the idea that wow, I can now choose because this being deductible or not. Now you may chose for it not to be deductible and you may choose … Like there are weekends when I go away with my wife. We're not going to talk business. Okay? We're just going to relax. Well, I've made a conscious decision that that's not going to be deductible. Right? We're not going to have meals that are going to be deductible. We're not going to talk about business. And we talk about business all the time. But we make these … We have these times that we don't. Other times I make sure that, absolutely, we're going for two weeks here, we're going for two weeks there. We're going to make sure that's business, we're going to make sure that's deductible, we're going to make sure that we have all the documentation. I want to make sure that happens. And the nice thing is, of course, my wife's also a CPA. So she understands also and she's much better at it than I am, documentation wise, so she kind of encourages me on the documentation.
It's not just documentation though. It's what do we do on a daily basis? If you want to change your tax, you have to change your facts. If you look that sentence … If you look at that sentence. If you want to change your tax, you have to change your facts. You is in there four times. If you want to change your tax, you must change your facts. Nowhere in there is that your tax advisor must change your facts. It doesn't happen. So I just want to encourage everyone that it's these daily activities that make all the difference. Little tiny things add up, whether it's deducting that travel that you're doing, whether it's deducting some meals, whether it's paying your child and actually documenting, again, documentation, documenting that they've worked for you, documenting their hours, documenting their pay, doing the W2 for them or the 1099 for them. All of these things, making sure that they have the bank account, making sure you have trust set up, if you need a trust. All of these things are things that yes, you have to do.
Now you can have team members do them, you're accountable. And when you're accountable, my experience is when we're accountable for our actions and when we think about this, particularly taxes on a daily basis … And who doesn't want to think about taxes on a daily basis. But if we keep it in our conscious mind then we're going to make way more money and pay way less taxes.
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