Chantal: Hey, Mike. Welcome along. Thank you for joining us on the show today.
Mike: Absolutely. Thanks for having me, and happy to be here.
Chantal: Now, we’re going to be covering a topic that I think is going to be of immense interest to many of the FBP family out there. We’re talking about bookkeeping, and accounting, and tax. Let’s start right at the very beginning. Tell us, at what point should our business be at to look at outsourcing, our bookkeeping, and our general accounting?
Mike: Yeah, so this question, I think, is very different for every business owner I meet and talk with. When I talk with someone, I think it really depends on what your background is in, how much revenue the business is doing, and really what your end goal is with the business. For someone, example, with no financial background, I would suggest working with a bookkeeper pretty close to right out of the gates, because it can be a really stressful and burdensome job that can bring them down and really take their attention away.
Now, for someone with, say, a little bit heavier financial experience, I would say they can probably go out of the gates doing, handling the books, handling the bookkeeping part on their own for a while. Once that business starts to open up, generate revenue, and really kind of start that growth, then I would say, “Get it off their plate,” because what we find in the fitness space is that so many people are just looking for opportunities to save money, but really they’re not … They want to be able to focus on growing their business at the same time, and that’s when I think that it’s time to kind of out, take that bookkeeping off their hands so that they can really look at the business at a more higher level. How can we grow? How can we get there, based on the information that that bookkeeper’s giving them.
Chantal: Mike, just speaking from personal experience, when I was personal training, I outsourced my bookkeeping, and I must admit, just thinking about what you just said, it made a huge difference to me because of, all of a sudden, I didn’t have that weight on my mind of having to look after that side of the business.
Mike: Yeah, no, and I hear that a lot with clients. Even as a firm owner myself, I was in that area, when I started our accounting firm, I was doing the bookkeeping [inaudible 00:02:04] and really, even though that that’s my profession, when I said, “I want to get out of doing the actual day-to-day-type work inside the business, I want to be able to look at it at a higher level,” and that’s when I brought someone on or a team member to kind of manage that part for us. But I think it’s very important that, to not be brought down or focus on things that you might not be a specialist in or might not be focused on when there’s things that you’re own, in a business because of your knowledge and expertise, and that’s really where your focus should be when you’re trying to grow that business.
Chantal: How about when it comes to our tax worker? At what point should we be looking at outsourcing that?
Mike: Yeah, so tax is a little bit different. When you’re a business owner, taxes can be very complex, so I typically recommend that everyone outsources this function right away. Unless they have some type of tax experience, right, then maybe they can keep it in house for a little while, but there’s a lot of things that can be done wrong, especially in the beginning, or potentially even worse, you could be missing out on tax deductions and things that they just weren’t aware of that could help lower that tax liability, but just simply because they’re not experienced with it or think that they’re too small or really easy now. They could be missing out on opportunities that could really kind of help them lower that tax liability. Back from bookkeeping, I would recommend taxes be a piece that are definitely done right at the beginning.
Chantal: Great suggestion. Now, I must admit, like when I first went out and started looking for a bookkeeper for my business, I didn’t even know where to start. I didn’t know what to do, who to look for, and I remember at the time, I was asking friends, and colleagues, “What should I look for when I’m looking for a bookkeeper?” Do you have any advice for us around that? I mean, how do we interview them, or how do we actually audit their performance to know whether or not that particular bookkeeper or accountant is right for us?
Mike: Yeah, so really, the first thing that I would do is just find a firm that either specializes in your specific industry or demonstrates values and an atmosphere similar to that of your business. I kind of always go back to this example. If you’re a modern, kind of new, up-and-coming business, you don’t necessarily want to be working with a traditional, old-school accountant that’s kind of working with every single type of business imaginable, just because their operations, how they work, are going to be much different from the way that you work.
When looking at a bookkeeper, looking for an accountant, I’d say, one, find someone that maybe specializes in your industry or at least has a focus in that industry, but then look for someone that’s got a culture, culture in their firm that reminds you, is similar to your business, because that’s going to make interacting with them a lot easier. That’s going to be the … Just make the whole accounting into tax practice so much more easier on you, because you run businesses in a similar type of fashion.
Yeah, so as far as judging on performance, how can you tell if they’re kind of doing the right job? This I would really just kind of base on results. Is work being completed on time? That’s kind of one key indication. If you’re waiting for work and unable to get ahold of the accountant or whatever it might be, that’s usually kind of a downside, but then also look at, are they actually helping you out? Are you receiving actual tax advice? Are you receiving tax-saving tips and not just, you talk to the accountant once a year, they prepare their file, and then you wait to talk to them to next year? I think this kind of goes back in determining what accountant’s the right fit.
Many people think accountants equal tax equals, “I don’t want anything to do with it, so I’m just going to avoid it,” and so that’s where I think if you find a firm that’s in the right fit, it makes that process much easier, because you’re excited to go to the meetings, you’re excited to get your taxes filed because you know that someone’s proactively working on your behalf to lower that tax liability and just really help your business out.
Chantal: Mike, I feel like this might be a really basic question, but when you said to look for a bookkeeper or an accountant that specializes in your field, is it as simple as jumping onto Google and writing “fitness bookkeeper” or “fitness industry accountant”?
Mike: I think that that’s one way to do it. You’re going to find a lot of stuff, and a lot of times, what you find when you do that search is people that are putting ads up, so I would start there. That’s one way to do it, but then also talk to people around the industry. Look at other industry places. Look at people that have written articles on more kind of popular sites in the industry on topics of tax, on topics of bookkeeping, finding someone that works with other people that you work with.
Another great example would be on LinkedIn. If you’re searching for an accountant on LinkedIn, and you find an accountant that’s friends with three other people that you know, there’s a good chance that they might kind of be specializing in accounting, so those are kind of some ideas that might get the ball rolling. I think it’s just really a combination of all that, and then also interviewing the accountant, because in the end, as the business owner, you get to choose who you want to work with and when you want to work with them, so I think looking at it as almost an interview is important as well.
Chantal: Okay, Michael. Let’s dive into some quick-hit tax and accounting tips. I believe you have five of them for us.
Mike: Yeah, absolutely. First one is, keep up with your books and review the data periodically. Next one is, do tax planning year round, so tax planning should be something that’s done consistently, not once a year. Monitor your spending and utilize the deductions that are available to you whenever possible. As a business owner, you have a lot of deductions that become available to you. Utilize them. Utilize them and get that tax liability down as much as possible. Next is, properly classify and organize your business. In the U.S., this could be a sole proprietor versus an LLC versus a C corp versus an S corp. Learn about those, and figure out which one is best for your estate, your tax liability, and your business. Finally, a tax tip, as we’re coming on the end of the year, is, delay the income at the year end, or accelerate expenses, if needed, to help lower your tax liability, and if it’s able to be done in your business.
Chantal: They are great tips, and there’s one in particular I’m hoping you might be able to expand on, and that is when you talked about deductions, because you said, “Make sure you use your deductions throughout the year.” Can you explain what you mean by that and maybe even give us a couple of examples?
Mike: Yeah, exactly. As a business owner, there’s a lot of activities that you do that you might not, you do on a regular basis that you might not realize are actually business-related. For example, travel expenses. When you’re traveling, let’s say you’re traveling with your family, there’s an opportunity during that travel that you can work business into the travel and be able to deduct a portion of the trip, so you might not be able to deduct the whole trip, but if you can make a business purpose as a portion of your travel, you’re able to then deduct a portion of that travel as a business expense. This is something that if you’re an employee of a company or anything like that, you’re not able to take advantage of opportunities like that.
Same thing with a meals expense. If you take a client out to eat or if you take a client out for drinks, that’s something that you can take as an expense. That’s something that, as a business owner, you have that fortunate ability to do that. As an employee of a company, unless you have the employee, a company credit card or something like that, you don’t have ability to take that deduction on the business side. What we kind of always recommend is, we want to get that business income as low as possible with deductions, but still, obviously, you want to grow your business, but you also want to have deductions available so that when that business income hits you personally, you’re not paying as much tax on it.
Chantal: Thank you for explaining that so clearly. I have one question, and that is, let’s say I am a gym owner, and I travel to another country, and whilst, let’s say I’m on holidays, but while I’m on holidays, I decide that I want to actually visit a couple of studios over there, go and have a training session so I can see what’s happening in another country. Is that a tax deduction?
Mike: Part of it would be a tax deduction. As far as just visiting another studio and, say, working out there, that one would be a little bit harder to fight, just because, so the IRS might say, “Oh, you’re just doing that as part of your daily routine of working out,” but if you’re actually going to the studio, talking with the owners, trying to learn about the techniques that they’re doing or the various types of exercises that’s working for them or marketing strategies that’s working in that country, you’ll be able to use some of that as a deduction. There are certain stipulations that get a little bit more detailed on how you have to, how much has to be business versus personal-related to get certain things expensed, but that’s something that we can follow up with and really kind of show in detail how you can make some of these travel expenses into business. That’s really a key point there, is utilizing kind of that opportunity available to you as a business owner and really taking advantage of it.
Chantal: Hi, everyone. The FBP family are all across the globe, and I’m sure that you know that we always try to bring you information that is relevant no matter what country you call home, but on the very rare occasion, like today, this next tip is specifically for our USA family, so take a listen to Mike’s advice, and perhaps what you can do is share this episode, or the transcript of the interview, with your own accountant, and they’ll be able to advise you whether or not there’s a similar setup available in your country. For those of you who are based in the U.S., I also asked Mike to share a PDF download about this process, and you can find that PDF in today’s show notes at fitnessbusinesspodcast.com. Okay. Now, back to Mike. Mike, I believe that you have one major tax savings strategy that all professionals need to know about. Can you share that with us?
Mike: Yeah, absolutely, and this is something that I get really excited about. This is a tax strategy that we implement and use with over 90% of our clients, and it’s called something, an S corporation. Basically, companies in the U.S. that are set up as sole proprietors, single-member LLCs, or partnerships, they’re faced with this nasty thing called self-employment tax, which is 15.3% tax on 100% of the business profits up to some certain limits. With this self-employment tax, this is over and above the regular income tax, and it’s unavoidable in almost every way. There’s no deductions for it. There’s no credits. It doesn’t even matter how many kids you have. This tax is coming at you if you make this money. Again, it’s 15.3% on the profit of the business, but fortunately, there’s a way to help limit this self-employment tax, and that’s by being taxed as an S corporation. What you do as an S corporation doesn’t change the entity at all. You still remain an LLC or a C corp, whatever entity you are. It just changes the way that you’re taxed.
With an S corporation, it splits the profit into two pieces, a reasonable salary and then a dividend or an owner’s distribution. The reasonable salary portion of income would still be subject to that self-employment tax, the same thing that they were subject to before. However, the rest of the earnings are not subject to self-employment tax, so that dividend or owner’s distribution portion would not be subject to that self-employment tax. It’s just simply a law where these S corporations do not have to pay self-employment tax on their distribution. I think it’s easier to kind of put numbers into this to really kind of understand, what are the tax savings that are available and how you can utilize it.
I kind of wrote up an example here. Let’s imagine that we had a business with $100,000 in revenue, and they had expenses of $20,000. That would leave a profit of $80,000. In that scenario, if they were set up as a sole proprietor, single-member LLC, not an S corp, they would have to pay over $11,000 in self-employment tax. This self-employment tax is over and above the regular income tax, so it’s in addition to. Now, let’s imagine we take that same company, that same $80,000 in profit, and organize them as an S corporation. With that, they decide that, as owner, they take a reasonable salary of $36,000, so 80, 36,000 of that 80,000 is taken as a reasonable salary. The remaining 44,000 of that would, of that profit, would be taken personally as a dividend or distribution.
In this scenario, they would only have to pay self-employment tax on that reasonable salary of 36, and that would give them a self-employment tax of just over $5,500. In the initial example, they were paying taxes of about 11. Now, we’re at $5,500, so you’re almost cutting the tax in half just by doing that S corp election, just by making that one change. Now, the key thing to remember is that this tax savings, it’s not just a one-time thing. It’s not just this year that we implement it. Those tax savings are year after year, and this can really be done with businesses of all sizes, so whether it’s very big or very small, generally stating, “This makes sense.” I always like to talk about this. There are some really big tax savings that are available for businesses, big and small, and it really is a no-brainer when you kind of look at the details of it. This is really why we recommend it to 90% of our clients that are on this kind of S corp type structure.
Chantal: Mike, I don’t know about all of the FBP family out there, but not being a numbers person myself, first of all, thank you for explaining that so clearly, and-
Mike: [inaudible 00:16:07].
Chantal: … when you went into getting us examples, that’s when it all kind of fell into place for me, but what I would absolutely love, if you could, is to supply us with a PDF that explains all of that that you’ve just gone through, because we would love to include that in the show notes. Do you think that would be possible?
Mike: Yeah, absolutely, and I think by taking kind of words and actually seeing it on paper, it makes it so much more sense. It’s very easy to iron it out that way, so I will definitely get a PDF for you guys.
Chantal: That would be amazing. Well, FBP family, make sure that you head over to the show notes at fitnessbusinesspodcast.com, and the PDF that Mike gives us, we will pop that in the show notes for today’s episode, so just like me, you can print it off, and you can actually read through everything that Mike just talked about, plus the example that he took us through. Now, let’s finish off today with our Fit Biz Inspiration and can you leave us with your three tips for getting organized with our tax no matter what time of year it is?
Mike: Absolutely. First, keep up-to-date books. I say usually at least monthly. This will help make that process much easier. You’re not scrambling at year-end. Two is, avoid cash transactions whenever possible. Cash transactions are hard to trace, hard to remember, so try to avoid them whenever possible. Now, I know that’s not … You can’t always avoid it, so in the event that you do have a cash transaction, just make sure you properly document it so that you can record that in the books and have everything on file. Finally, gather tax documents in a safe place and keep good records and receipts on file.
What I always recommend is, is having for receipts, using an app where you can just take a picture of a receipt, put it on file. It allows it to just store it digitally. You don’t have to worry about where that file, where you hold that paper receipt. You know that everything’s on file. The big thing with receipts is to write the who, the what, the where, the when, the why, so as you’re going on these business meetings or getting receipts, write down the main things there so that if you need to look back at it, say, a month down the road or two years down the road, you know exactly what that receipt was for.
Chantal: Are there any apps that you recommend for collecting that information?
Mike: Yeah, so there is a couple different apps. Receipt Bank’s one of them. What we recommend is just setting up a Dropbox file. That’s what we do internally. We set-
Chantal: A great idea.
Mike: … up Dropbox-
Mike: … take that picture, and just kind of upload it directly to there with a little note that says the date and maybe the location, and maybe the amount, and save it that way.
Chantal: That’s actually a really great suggestion. I hadn’t thought of that before, and it’s such a simple way. I don’t know about everyone else out there. We use Dropbox for absolutely everything, and the phone app is very, very handy, so that’s a great way to collect and save all of your receipts. Thank you, Mike.
Mike: Yeah, absolutely.
Chantal: Well, this has been fantastic. Thank you for taking us through all that information and give us an idea of when we need to start outsourcing our bookkeeping, and our accounting, and our tax work, giving us those great, quick-hit tax tips that you left us with. Of course, that fantastic tax savings strategy, and I love your three tips for getting organized with our tax, no matter what time of year it is. Mike, if people want to contact you, where’s the best place for them to reach out?
Mike: Yeah, so the best place is to go directly to our website. It’s www.JETROTax.com. That’s spelled J-E-T-R-O-T-A-X dot com. They can also feel free to email us, so they can email us at [email protected] and reach out. Someone from our team will get back to them and be able to answer any kind of additional questions that they might have from the information.
Chantal: Mike, thank you for joining us today, and thank you for sharing your expertise with all of the FBP family.
Mike: Yeah. Thanks for having me. It’s been a pleasure, and look forward to talking soon.
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