Subscribe
Share
Share
Embed
In Episode 191 of the Teaching Tax Flow podcast, John Tripolsky and Chris Picciurro dissect a complex case study from Chris's book "Defeating Taxes." They delve into the story of "Scoop and Sprinkle," a married couple owning a thriving ice cream shop in a high-tax state. This episode emphasizes the critical importance of strategic tax planning for business owners experiencing significant income growth, showcasing practical solutions and strategies to optimize their tax positions.
This case study reveals the intricacies of managing a successful business in a high-tax state. Chris outlines the common pitfalls business owners face when escalating income leads to staggering tax obligations, highlighting the necessity of proactive tax planning. With insightful discussions on the impact of business structure inefficiencies, missed planning opportunities, and strategic shifts like S Corporation elections, Chris and John provide listeners with actionable advice to reduce tax burdens strategically. This episode serves as both a blueprint for effective tax management and a testament to the power of financial foresight in business operations.
"Defeating Taxes" NOW Available on Amazon
https://www.defeatingtaxes.com
The HUB
https://www.teachingtaxflow.com/hub
⸻
EPISODE SPONSOR
Wealth Builders Mortgage Group
Your trusted mortgage partner for investors and entrepreneurs.
👉 https://www.wealthbuildersmortgagegroup.com
⸻
👉 Spotify https://bit.ly/3KdmtJL
👉 Apple Podcasts https://apple.co/3ZkyEtX
👉 Amazon https://amzn.to/4qmdqa5
👉 iHeart https://bit.ly/iheart-TTF
This case study reveals the intricacies of managing a successful business in a high-tax state. Chris outlines the common pitfalls business owners face when escalating income leads to staggering tax obligations, highlighting the necessity of proactive tax planning. With insightful discussions on the impact of business structure inefficiencies, missed planning opportunities, and strategic shifts like S Corporation elections, Chris and John provide listeners with actionable advice to reduce tax burdens strategically. This episode serves as both a blueprint for effective tax management and a testament to the power of financial foresight in business operations.
"Defeating Taxes" NOW Available on Amazon
https://www.defeatingtaxes.com
The HUB
https://www.teachingtaxflow.com/hub
⸻
EPISODE SPONSOR
Wealth Builders Mortgage Group
Your trusted mortgage partner for investors and entrepreneurs.
👉 https://www.wealthbuildersmortgagegroup.com
⸻
👉 Spotify https://bit.ly/3KdmtJL
👉 Apple Podcasts https://apple.co/3ZkyEtX
👉 Amazon https://amzn.to/4qmdqa5
👉 iHeart https://bit.ly/iheart-TTF
Creators and Guests
What is Teaching Tax Flow: The Podcast?
Welcome to “Teaching Tax Flow: The Podcast”, the show that’s all about demystifying taxes and helping you keep more of your hard-earned income in your pocket.
Hosted by tax experts from the Teaching Tax Flow team, this unfiltered (but clean) podcast is designed to empower you with the knowledge and tools you need to confidently navigate the world of taxes. We’ll cover everything from understanding tax laws and regulations to maximizing deductions and credits.
In each episode, we’ll break down a specific tax-related topic in a clear and accessible way, providing practical tips and strategies you can use to optimize your tax situation. We’ll also answer listener questions, share the mic with amazing guests, and share real-world examples to help illustrate key concepts.
Whether you’re a freelancer, small business owner, real estate investor, or just looking to understand your taxes better, this podcast is for you. So tune in, take notes, and start building your confidence in taxes today.
Produced and hosted by Teaching Tax Flow.
www.TeachingTaxFlow.com
Everybody, welcome back to the Teaching Taxes Podcast episode 191.
John Tripolsky:We're diving back into that Defeating Taxes book that somebody on this episode actually authored. So we're gonna take a page out of that book, not literally. We're not gonna rip out, but we are looking at a case study for somebody that lives in a specific type of state. I'm not going to say it yet, but is a business owner. So let's dive into this.
John Tripolsky:Let's take a scoop out of that book. Chris Picciurro, why did I just make that reference, actually? Post my You know what? It's a
Chris Picciurro, CPA:pretty good pun, better than most of your dad jokes. I'm happy to be back. As many people that are subscribers and and listeners of this podcast know, our defeating taxes book, which I'm probably putting up here. Actually, this is the this is the old author the first author copy not for resale. You know?
Chris Picciurro, CPA:One day this might be in the Smithsonian.
John Tripolsky:You know I don't even have an you know what I don't have from you, Sarah, is I don't even have a signed book. What the heck's going on?
Chris Picciurro, CPA:That's alright. What about me? Send one to you. I could send one to you next time you come down to beautiful Franklin. We have four case studies in this book.
Chris Picciurro, CPA:This case study is gonna be talking about those business owners that their business has grown exponentially. However, they really didn't focus on tax planning. They were making money. They've making money maybe that they've never the amount of money they've never made before, and they just got caught in that looking in that that that rearview mirror too much. And so yeah, so why John?
Chris Picciurro, CPA:This is Scoop and Sprinkle's. They are a married couple that own a very successful ice cream shop in a resort town. Now as you know, some of these case studies are based on my real life experiences. Obviously, facts have changed. Names have changed.
Chris Picciurro, CPA:However, you know, whenever you're really talking about your experience as a CPA or maybe an enrolled agent or maybe an attorney, a doctor, you really can't make up stories case studies better than what you've seen in real life, especially doing this for over twenty five years. So I'm excited that we're gonna dive in today. So if you live in that high tax state, if you're a business owner or even know someone that's a business owner, do them a favor and share this with them. We're dive in to scoop and sprinkle right here and I think it's a very common common situation. Now, maybe the amount of income that they're earning isn't common but the fact pattern is is very common.
John Tripolsky:Sure and even with this one, Chris, I mean, I've I've seen it. I know you have for sure, right? Some people, they may have a a full time job. So, we'll say they get a w two. Right?
John Tripolsky:Then, they kinda needle in maybe doing their own thing, you know, launching it. Maybe don't take the plunge completely and then they do and of course, they're like, holy cow, like this is a whole different world for me. I've made, which you throw out a number, right? Like, oh my gosh, now we're making $1.5.2000000 a year versus 200,000 I was making before. So, you know, you mentioned that they're making, you know, a significant amount of money that they've never had before as far as for income goes, and it opens up a lot of windows.
John Tripolsky:But when we talk about the rearview mirror, right, every time we say rearview mirror, you know, in regards to tax planning, I can't help but think about if you're staring at your rearview mirror too long, you're And once you hit something, you're you're there. Like you can't go back and say, oh crap, I ran over the deer or something, right? You already did it. Right. You gotta get around it, start over again, right?
Chris Picciurro, CPA:It's gonna be expensive and and a lot of times I'm working with these type of clients and people in our Teaching and Tax Tool community, you'd be surprised at how many people are just, they're so focused on their business. They know money's coming in. They know more money's coming out. They know their bank accounts going up, but they really don't know how well they're doing. And it's kind of the curse of being super focused on your business but not saying, okay, you know, it's almost like someone that's getting wanting to get into shape and they're exercising a lot, they're eating right.
Chris Picciurro, CPA:And they're so focused on it that they like, they don't ever go back and weigh themselves or look at their their their, your body mass index. They're just kind of in it for the for the grind, you know, and they're in it. But, you know, you talk about finances and and let's talk about Scoop Sprinkle that they have a family. So, yeah, Scoop Sprinkle, they own an ice cream shop, local ice cream shop, and a resort town. They're in a highly taxed state.
Chris Picciurro, CPA:So, you know, not the Florida, not the Texas. They're gonna be in a California. I know you wanted to hear that. They could be in you know, who knows? They could be in New York.
Chris Picciurro, CPA:Right? This could be on one of those they could be on the Jersey Shore, which could be very, very possible. But they own this ice cream shop, and they operate it as a Schedule C. They are in that high tax state and they have about $700,000 of net income, which is pretty crazy, which is awesome, right? And they had their tax return prepared and they found out they owe about a $100,000 in tax despite making estimated tax payments.
Chris Picciurro, CPA:They also feel that this is not a fluke. Right? It's it's this income is gonna continue moving forward. They're in a great spot, but they're also, you know, they're also renting that spot out. So they know that that that's a that's a risk of their business.
Chris Picciurro, CPA:So they also have they also have two teenagers that work in the business that actually help them. With scooping that ice cream, right? This could be a very this is like I said, this is a real case study that that existed in in in as the kids say in IRL, right? But. Probably.
Chris Picciurro, CPA:These teenagers are working in the business, especially if it's a seasonal business. Think about the Jersey Shore. Think about I mean, you're in Michigan. Right? This could be in Traverse City, Charlevoix.
Chris Picciurro, CPA:This could be, you know, on on any of those little coastal towns, and they could definitely have their teenagers helping them out doing real work in the business. So wow. Okay. So we've got ice cream business. We've got, you know, it might be seasonal.
Chris Picciurro, CPA:We've got 700,000 worth of profit. The good thing is they don't have a lot of inventory costs, right? So it's not like a car dealership or they don't have to buy super heavy equipment. So they do have a lot of liquidity available. So remember, liquidity is really important when it comes to tax planning and strategy.
Chris Picciurro, CPA:What does liquidity mean? How much cash you have available to deploy into making tax moves, for lack of a better term. Because if you have a you know, I'll give you an example, John, a taxpayer that's a house flipper, very challenging to tax plan for because with a house flipper, don't get to deduct the cost of the house or the rehab until you sell the property. And for a lot of house flippers, especially when they're just getting started, they're bootstrapping their company because they don't have the background. They don't have the history to finance these or the house is so dilapidated that that it's not financeable.
Chris Picciurro, CPA:Maybe they're taking out a hard money loan. So my what they might do is they might have to deploy a lot of their cash, their profit to buy more property, but that doesn't leave them a lot of cash to make any tax moves. And a lot of times, those type of clients owe more tax at the end of the year than they have cash, and they don't understand that cash flow over tax flow. But not Scoop and Sprinkle's. They understand they made their quarterly estimates, and this is very common for taxpayers.
Chris Picciurro, CPA:Hey, I made my quarterly estimated tax payments. How can I even owe money at the end of the year? Because right, when you have a W-two, typically that tax is withheld out of your paycheck. Well, remember, many times your quarterly estimated tax payments are in what we call a safe harbor situation. Oh, by the way, check out.
Chris Picciurro, CPA:I'm sure we I think we got a podcast. I don't if we have 200 putting the podcast now. We gotta have one on estimates. And if we don't, we'll put it on the list. But a lot of times, those estimated tax payments are based on the previous year's income.
Chris Picciurro, CPA:So if your income grows or let's say you made a large equipment purchase in one year, would would reduce your estimates for the next year. So just because you make estimated tax payments doesn't mean you're not going to owe anything at the end of the year. Now if Scoop and Sprinkle's had a tax projection done, if they're in the teaching tax law community and went through the processes that we believe in with their tax professional, this, they might be looking at a $100,000 balance due, but at least they would know it, and they would be able to take take take time. So so they had a $100,000 balance due. They didn't like that even though they made their estimates.
Chris Picciurro, CPA:So we're thinking, okay. What could we do this year for Scoop and Sprinkle? Right? We've got a schedule c. Got a schedule c that and, you know, paid a lot of state income tax also.
Chris Picciurro, CPA:So let's think about this. Now, John, you know, I usually get a little frazzled and razzled when people propose that they should just automatically be an S corporation. Right? So what? Alright.
Chris Picciurro, CPA:Oh, yeah.
John Tripolsky:That's like somebody telling you that they're a Michigan Wolverines fan. You know,
Chris Picciurro, CPA:you know. Yeah, exactly. Could it could it definitely. Smack around
John Tripolsky:a little bit.
Chris Picciurro, CPA:Definitely brings up the the frustration level. However, remember, if you're watching, listening, and you could do this on your own, have a process for tax planning. This couples marginal tax rate mean for every every extra dollar they earn, how much is going to their involuntary business partner, which is gonna be their state, could be even be a city if they're in New York. Right? In federal government, almost 50% of their income is going elsewhere, at least 40%.
Chris Picciurro, CPA:So okay. And the Plains paying state tax and at their income level, they're not getting much of a deduction as for any state tax paid.
Ad Read:This episode is sponsored by Wealth Builders Mortgage Group, powered by Movement Mortgage, one of the top mortgage teams in the nation and a powerhouse in the real estate investing world. With over 1,100,000,000 in closed mortgage volume and more than 3,000 investor deals under their belt. They don't just talk the talk, they walk it. Their team specializes in helping short term and long term rental investors scale smart with customized lending strategies. They offer all STR loan products, including second home, investment, non QM, bank statement, asset based, and HELOCs.
Ad Read:They also offer all primary home loan products, too. Whether you're just starting out or expanding an existing portfolio, their unique path of 10 strategy is designed to help you move from a nine to five job to financial independence. If you're looking for a lending partner who truly understands the investor mindset, visit wealthbuildersmortgagegroup.com and start building your roadmap today.
John Tripolsky:Before we go too much further, because I I think I have a feeling where you're gonna go into the net this next, I wanted to step back just a little bit and kinda circle back to something we talked about earlier. Right? Like somebody, you know, say they well, you we're just throwing numbers. Say, know, you made let's call it an even million. Hey.
John Tripolsky:You made, you know, a million bucks this year. You've done your quarterly estimates, and you still get hit with a tax bill. So that's kind of a, you know, a shock to them potentially. But then really, if they're missing the boat with tax planning, right? Because to me, I look at tax planning is it's not just sounds kind of crazy, it's not just about taxes, it's really about business forecasting kind of as a whole a little bit, because it's an outside opinion looking at it.
John Tripolsky:Now we're not talking about hiring a CFO or something for this necessarily, But really, you know, what if it's a business, they get into it. Alright, great. I made a million bucks. I used to make 200,000 in my w two. You know, I think in tax planning, right?
John Tripolsky:Like, I'm sure it happens with you and clients, you might look at it and you might say, you know, this is what you made this year, but next year, you might actually make 600,000 something might come up, where to you, it's not a red flag, but you might identify something that is gonna cause them to make a lot less next year. And that probably goes into planning too a lot, right? So again, it's kind of an outside opinion, because really when you get into business like you know, at the beginning, you're doing a lot, you kind of have blinders on in some sense too, but you tend to be a little bit more optimistic about long and short term where sometimes it's a little delusional, I guess, for lack of better terms, right? So you can kind of help people guide that on that path. Correct?
Chris Picciurro, CPA:Well, comes down. Yeah, you're hitting some good points. The the process is this. You need to first start with a tax projection. As I mentioned, cash flow and tax flow are different.
Chris Picciurro, CPA:So let's look at Scoop and Sprinkles. Let's say they started making their own ice cream that's proprietary, right? And in the year before, they bought an ice cream machine, making machine, that costs them $200,000 and they deducted the entire machine. So so their their net cash coming in, their their profit before depreciation or before equipment purchases is the same, but their tax is $80,000 more to $100,000 more this year because they didn't buy any equipment. Now they don't need another ice cream making machine if they're staying at their capacity that they're at.
Chris Picciurro, CPA:So it all starts with figuring out what your tax projection is. Then we diagnose based on your marginal tax rate. So for Scoop and Sprinkle's, they're a red diagnosis, high marginal tax rate. Then we prescribe different implementations, which I'm going to talk about in a moment. And then we look at the, does it make sense tax wise, IQ test, and then implement.
Chris Picciurro, CPA:Remember ideas are cheap, implementation is valuable. So like you said, in their mind, they might be saying, well, I'm going to make $600,000 a year this year. You know, make 600,000, but if they don't buy any of equipment, their taxable income might be higher than the year before. So your your balance due is just a result of what you've paid in for tax as far as estimated tax payments for Scoop and Sprinkles versus what the tax actually is. So with Scoop and Sprinkles, they've got a few situations, right?
Chris Picciurro, CPA:They're in a high, high marginal tax rate. They're paying a lot of self employment tax and they're paying a lot of state income tax that they're getting no benefit for. So they have potentially an inefficient business structure. So yeah, there are a lot of things out there that we have to determine. I'm I'm using example.
Chris Picciurro, CPA:Let's say she's I said, hey. This guy you know, not to keep bringing up health and wellness, but let's say you say, hey. This guy is six foot one and and two hundred and forty pounds. Now that could be made up a lot. You could be a linebacker, an NFL linebacker, and have a eight percent body fat index and look like an Adonis.
Chris Picciurro, CPA:Kinda like you, John. I don't think you're six one, though.
John Tripolsky:Or quite. It depends.
Chris Picciurro, CPA:Or you could be have a really small frame and be six foot one, and your body should be carrying about a hundred and eighty pounds, and you're carrying two forty. So just because you have a heightened weight doesn't mean you're healthy or not healthy. So just because you have a certain amount of cash flow coming in or profit, we have to dive in and see what that profit looks like. So that's why you can't just take your bank account and say, that's my tax projection. You need to run a tax projection.
Chris Picciurro, CPA:That's always step one. So to your point with Scoop and Sprinkle's, if they're if they're if we think we're gonna make $600, they're still the same diagnosis as 700,000. It's just a it's a matter of, okay, what do we do? So let's talk about, as we wrap it up, the most important action items for Scoop and Sprinkle's. As I mentioned, I'm usually not a proponent of s corps.
Chris Picciurro, CPA:In this situation, I would highly recommend we take a look at the s corporation. Why? Number one, Scoop who really runs everything, let let's say, he as a most people that run an ice cream shop and they're where they're very hands on, the book says they're very hands on operations, wouldn't make a $700,000 a year salary. So we could probably make an argument that his salary from the from the ice cream shop would be more modest. We run what's called a reasonable compensation study.
Chris Picciurro, CPA:So let's say we paid Scoop $60,000 a year, which is the managing, you know, managing a quick service restaurant average in his community. I'm just that right there now. Now we're only paying payroll taxes on $60,000. We make an S corp election. We pay Scoop $60.
Chris Picciurro, CPA:We then have the remaining amount of profit. We're still gonna have to pay state tax on on the entire net profit, but we can make a PTET election, pass through entity tax election, and have the S corp pay all the state income tax, which could be, I mean, what, dollars $50.00 a year pretty easily a year and now get a federal tax deduction. The kids are working with that
John Tripolsky:that that S corp and and if anybody's not familiar with that, basically, all you're doing right is you're you're you're breaking out reasonable comp. So, reasonable compensation, payroll for one person and kind of leaving quote unquote the rest in the business where if you just have a straight, you know, LLC, no S corp, any of this stuff, it's one and the same. There's no separation between business income and personal. It's kinda lumped together self employment tax. Right?
Chris Picciurro, CPA:Yeah. You you're taxed differently. I mean, leaving the money in the business and not and taking it out is a different issue. It's it's a matter of Sure. You're paying tax on you're you're paying you're identifying some of your profit as salary.
Chris Picciurro, CPA:The rest is not. If you take it as a distribution or not, it really doesn't play too much of a role, but that's gonna help out. He could do the PTET election. We could put the kids and maybe sprinkle on the payroll. The kids are going be at a lower tax rate.
Chris Picciurro, CPA:Now, if he's a he's self employed, there's some payroll tax benefits to having minors as an employee but even if the kids make $20.00 each, moving that out of Scoop and Sprinkle's marginal tax rate to the kids is huge. Then we can start making retirement plan contributions. And since they're a red diagnosis, we might put Sprinkle on the payroll for the it said in the case study that she's doing some administrative work. We might pay her and Scoop and Sprinkle might contribute to maybe a solo K plan. And then the kids, we might just pay out of W two and they might contribute to a Roth.
Chris Picciurro, CPA:So again, idea is cheap, implementation is valuable. What am I saying for this? Lowest hanging fruit. Look at their inefficient entity structure. Layer in some retirement planning for them, for both the parents and the kids.
Chris Picciurro, CPA:Pay the children. Final thing, very low hanging fruit, potentially buy a building in the area that they're in. And then if they own the building, they could do a cost segregation study in the building and take significant depreciation deductions and offset that that income. So, there are obviously, John, you know, we have 91 tax planning implementations that we believe in. We have content in almost all of them.
Chris Picciurro, CPA:At this point, 91, there could be more But what happens sometimes with tax planning is taxpayers get 70 things they should do and that's way too much. Let's start with the lowest hanging fruit that's going to hit the least amount of effort, least amount of cost, give them the best result possible. Then from there you can layer in a leverage charitable giving or some of these other more advanced strategies, but let's focus on entity selection, retirement plan and income shifting.
John Tripolsky:And a lot of it, which I was kind of thinking too, as we're doing this, right? There's so many ideas out there. So sure, a lot of people can do some DIY quote unquote, but the problem with it is is if you don't match and pair them together correctly, you could be in for a world of hurt, which is worse than you went into it at, and then you're having to have somebody help you anyways to kind of get you out of a mess, which then costs you something. There's a there's a lot of detail to it. Yeah, that the biggest thing to take away from this right is that planning is really not a quote unquote option, it really is a necessity at some point.
John Tripolsky:Right? I think for a while you can get around it. I mean, unless of course you just like spending money, which if that's the case, I can share my wife's Venmo, you can send it all to her. But Chris, like you mentioned to a lot of it, know, there's so many options, so many things people can do. Planning is key, really, at the end the day.
John Tripolsky:I don't think we need to harp on that. And everybody just get on that Defeating Taxes. Go to defeatingtaxes.com, the link here in the show notes. Click on that. It'll drive you to the Facebook group they were talking about a couple times.
John Tripolsky:I think there's a link in there for the book, if anybody wants that. And there's just other things, right? Like go in there, explore. YouTube is the best way. I'm sure most people do watch this on YouTube, not just listen to it.
John Tripolsky:807 videos we got in there. So check them out. It's all free. It's not like we're gonna charge anybody for it. And, you know, Chris, I don't let's not say what your hourly rate is with clients if it breaks it down, but you guys are getting some of the best knowledge you can possibly get literally for free for the price of your internet connection.
Chris Picciurro, CPA:So check
John Tripolsky:it out. Big guy, did I miss anything else you wanna add to this one about Scoop and Sprinkles? Maybe we'll do another case study on, like, Rocky And Road or something for a
Chris Picciurro, CPA:Maybe. Maybe we'll Friday. Day. Yeah. Thanks for being a part of the community.
Chris Picciurro, CPA:And and, you don't have to be making $700,000 a year to see tax planning work and have a great rest of the day.
John Tripolsky:Awesome, everybody. You heard it from the from the man himself. Some of that advice here as we walk through the specific case study from that defeating taxes book. And we'll see everybody back here again on the podcast next week. Haven't said this one in a while.
John Tripolsky:Right? Same day of the week, different date, completely different topic. Have a great weekend.
Disclosure:The information in this podcast is educational and general in nature. It reflects the opinions of teaching tax flow and does not take into consideration the viewer's personal circumstances. It is not intended to be a substitute for individualized financial, legal, or tax advice. Consult the appropriate qualified professional prior to making any decisions. Securities are offered and supervised through Cabin Securities Inc member, FINRA SIPC.
Disclosure:Investment advisory services are offered and supervised through Cabin Advisors LLC, an SEC registered investment advisor. Chris Picciurro is a registered representative of Cabin Securities and an investment advisor representative with Cabin Advisors LLC, teaching Tax Flow as an independent entity and is not affiliated with Cabin Securities or Cabin Advisors.