Neal McSpadden on Solopreneur S-Corporation Break-Evens and IRS Audit Avoidance

hey guys welcome to this week's podcast episode and I've got a fantastic guest for you today Neil mcpadden and he's from the tax Sherpa you can see what all he does basically maximize savings uh save on your taxes uh you know we'll talk about utility of taxes um but uh taxes are your biggest expense but he saves solar preneurs and small business owners T of thousands of dollars on their taxes all without earning any more or spending any less so really interesting um and so I'm really happy to welcome Neil to the show very timely appearance yeah yeah good to be here uh we got a couple days before the big 415 but uh you know the the thing about the thing about the the 15th is that it's only a deadline if you owe money so uh if you are you know a W2 employee

like you know a physician or an engineer or something of that sort most of the time you’re probably going to get a refund unless you were doing something super aggressive which I’m not opposed to but yeah so it’s it’s only a deadline if you are if you are owing money then you got a final extension you got to put in a payment if you know if you have one otherwise they’ll start charging interest but uh but everybody else everybody’s getting a refund and everything they’re you know the IRS if if they owe you money you will never hear from them but uh if you owe them money or they think you owe them money then you’ll start to get letters and things like that yeah so uh definitely want to keep up to to up to date on that yeah yeah uh yeah that’s uh yeah like I

said um if if you get a refund basically you gave the federal government a 0% interest loan and um but it’s you know it’s always it’s always nice to get that refund but you know if you have to Shell out money it’s like oh man but it’s actually good thing because you could you can use that money to work for you during the year so uh yeah clients uh who have to make that decision throughout the years like well do I want to put in estimated payments or do I want to keep that money and do something with it you know I tell them if you don’t they’ll charge you extra and it’s you know so there’s an underpayment penalty which is you 3 perish usually of whatever the tax is so 90 something percent of the people I I go through that with they’ll say I I’ll just keep

the money and pay more pay a little bit more later because I can make better use of that money in my own portfolio than they can uh with just covering that that penalty basically yeah so here’s one question I have is um you know as a solopreneur or entrepreneur and um you know you’ve got your quarterly estimated taxes um you especially with 415 right you’ve got you’ve got um the year prior that tax return if you owe money and then plus you have that first quarter of the the current year so it’s almost like you get double taxed so my question for you as I was thinking about this I was like what what happens if like it’s because these quarterly estimated taxes as long as by the end of the year year you pay you know kind of you know approximately what happens if you um

skip 415 like that q1 or you just pay a little bit less but then you make up for it in like in the SE for the um was it the July or actually July or the the next one the Q2 one yeah it’s it’s uneven so it’s 415 615 9:15 then 115 so yeah so if if you ask the IRS that question they’ll they’ll tell you well you should have made your fourth quarter pay back in January and you wouldn’t have that issue so but you know a lot of times like if you if you’re in like uh a syndication or you’re you have some other income that you don’t know what it is yet then uh you know that’s not realistic so um the the real life answer is that well two two things so one is that if you have uneven income um then

there is this is on the form 2210 which is the underpayment calculation worksheet um if you have uneven income throughout the year then you can actually put in the in the worksheet that you know those that unevenness and so if if it works out such that q1 would have been a lower quarter anyway you can go ahead and pay less and they won’t bother you about it also in the in the real world kind of scenarios that you know if you make it up in Q2 Q3 Q4 so that you wouldn’t have uh a balance du you know in the following year then you know they’ll charge you a little bit just for that first quarter Mis payment but you know it’s it’s almost a negligible amount at that point so um so yeah there there are there are definitely cash flow management strategies you can apply it’s

like well you know how much do I want to allocate to the different things um you know versus you know Q2 Q3 Q4 or just pay it all at the end or what have you it kind of depends on how aggressive you want to be as far as you know your Investments and uh how much you know you just don’t want to pay them so when I talk to some people it’s like well not going to pay them a dime sooner than I have to and that’s just a philosophical stance that I have so if if you’re one of those then yeah wait till wait till the next uh April and you’ll pay a little bit more and that’s just how it is but you’ll have your money so yeah so yeah so so it’s not the end of the world if you miss a quarter but um you know

again if you ask the IRS they they’ll want you to pay you know as much as you can as soon as you can and give you those interest free loans yeah so they so basically they can go fund Wars and you know killing and civilians and you know bail out the rich people so so over over the past couple years I’ve been coming to this conclusion that uh taxes as a whole are unnecessary so uh you know we’re running two trillion dollar deficits or three trillion doll deficits now and you know the CBO just came out with a report uh saying that basically they do 10year projections and basically the the deficits from under current uh you know budget projections are going to be at least $ 1.6 trillion from here on out it’s not that long ago that the whole federal budget was $1.6 trillion

so we could just fund that budget with just inflation and uh or you know net borrowing you know whatever they want to call it and uh you know we wouldn’t have to I’d be out of job but we wouldn’t have to file taxes at all it’s quite interesting um yeah there’s a you know like I said um the so you know one question I have for you is um this uh your um you know we can’t really fight the taxes because that’s the law but um one one thing it’s talking about is um uh you know for tactics this is interesting for taxes to save you 18,000 on your taxes yeah so uh you know we’ve kind of come up with over the years this uh tried andr kind of approach especially for solopreneurs uh business owners independent contractors uh it also works for uh if you’re a W2 person

but you don’t have as much flexibility because because when you have a W2 you know they get you up front you know they pull out taxes on on the front end so there’s there’s less to do uh there but things can be done um so basically you know money comes in uh that’s going to be your revenue and money’s going to go out that’s going to be your expenses or after those two things happen uh then there’s a multitude of choices to make uh so a lot of this revolves around entity structuring there’s you know over 23 million businesses in the US that are structured in my opinion in the wrong way um as far as tax optimization and then there’s also um there’s also additional strategies there’s uh there’s meeting strategies there’s reimbursement strategies there you know if you have kids of the right age and and a couple

other qualifications put them on payroll um there’s you know compensating yourself uh optimizations to be done there you know retirement planning all this kind of stuff and you know we have a a kind of set of four four those things that work for just about every business and so that’s going to be uh 92% of the time escorp is going to you’re going to want an escorp in your mix somewhere you can have Partnerships that feed into your escorp so like if you’re doing joint ventures with other people see that a lot um or if you have uh if you want to separate assets into different llc’s for liability purposes that’s all fine but it’s all going to flow into an escorp as kind of like your home base uh and like I said 92% of the time that’s going to be the way to go um

meetings strategies as far as having uh business management meetings for yourself and uh taking uh meeting rental expenses for that um if you do it under specific guidelines then it’s uh basically taxfree income uh reimbursements for yourself uh from your business for the business use of your stuff you know uh cars and travel and you know that sort of thing um and then optimizing your own compensation at at that level is uh those four things together you know 18,000 is actually a lowball number I always do that in a conservative kind of way because where that number comes from is like if if you earned 100K and you and you implemented these four things and you did it in a you know reasonable thing and and uh you know you’re married filing joint you got two kids that’s already putting you in in an advantageous position but even

with all that uh you know you’re uh it comes out to 18 179 I think it’s the number but often times you know um you know we’ll save clients you know you know uh we did one the other day it was 32,000 uh another one last week was 28,000 uh with with the same strategies but you know everybody’s numbers are going to be different depending on what your numbers and what your situation is yeah yeah the other question like I said uh so here’s another thing I talk you know what about like solo preneurs let’s say they make like um you know just like they make you know they make enough like six figures let say they 200 like what’s the income level at which you should start considering escort because like um you know a lot of doctors are locom so they so get 1099 and they make 6 700k of

course you want to escort but what is the kind of the income Threshold at which you say I don’t want to file escore I but I have a business and I can you know deduct my expenses kind of like as a what’s it called it’s called the um I don’t know what it’s called but it’s just kind of a self-employment I think that’s what it’s called like what are your thoughts on that yeah so if you talk to 10 different accountants you’ll get 10 different answers to this question uh and I I’ve heard a huge range when I when I’ve talked to clients as far as you know what what other people have said so in my opinion you know because what happens is you know if if you’re doing an escorp it it does increase the complexity you’re going to have to file an additional return U you’re going to have

to you know you probably have an entity anyway so that Pro that part will probably be the same but you know it’s it’s more work it’s more overhead and all that kind of stuff but uh in terms of like where is the break even for me it’s low uh you know 3040 Grand and it’s it’s worth doing and and so there’s there’s two components to that though so one is that uh you know you’ll just come out better on the tax side and we you know what we do we’re always looking to optimize on the tax side audit risk so uh I don’t know if you’ve heard the the chatter out of Congress and the white house uh they are looking to audit a lot more and the IRS puts out a publication every few years called the tax Gap report and the and the Gap is uh they say we think

Americans should have paid us you know this much and we actually collected this much which is a smaller number and the difference is the gap and they break down the uh the different sectors that the Gap occurs in and the single largest uh category which accounts for a third of the Gap is on uh 1040 Schedule C so that’s the profit or loss from business of uh an either an unincorporated entity like a like you’re getting a 109 to your personal name or if you have an LLC but it’s disregarded it still files a Schedule C yeah yeah and uh you know all the all the headlines over the last year or two have all been like you know if you’re making over $400,000 a year we’re going to make sure you pay your fair share all that kind of stuff so you know the the Looms doctor making 600k that’s

you they’re they’re looking for you um so you know the the other advantage to shifting it to an S corporation is getting it off your tax return and it it’s going to reduce your risk of audit by about a factor of 10 it’s uh it’s hugely beneficial even if there’s no tax savings that’s still a benefit of just reducing your risk of audit the other question I get it a lot is um because I know a lot of um people they they stress about the 415 deadline but then a lot of um especially High net worth and then you know love the um you know the multi the 100 million and the uh you know the billionaires they they do this strategy where they file an extension and then they file in October and then they said your risk of audit in October is a lot

less because it’s like uh so what is what is your thought about using that as a tech strategy that’s true um so what happens is each year the IRS picks a pet topic um and we don’t know what it is until like two or three years later but uh one year a few years ago they were looking at charitable contributions and so they come up with a quota they say we’re going to examine 700,000 things tax returns that have this on it and you know as as a tax returns get filed you know that quota gets filled up and once that quota is reached they stop so so if you’re doing something that you you uh you think is more aggressive or if you just don’t want the hassle then yeah you can you can wait now the extensions the the the thing you remember about extensions is

that it extends your time to file paperwork it does not extend your time to pay so uh that’s that’s where that if you owe money they want it by 415 otherwise they’re going to start charging you um so uh that’s just something to keep in mind but even if you’re getting a refund you might still want to wait just to you know if if you know cash flow wise that works for you uh if you just want to reduce that that potential problem so like random getting your name picked out of a hat uh chance of audit is about 05% so you can reduce that if you the longer you wait the more it’s reduced basically yeah it’s quite interesting so basically you know the billionaires if they even owe a tax refund they would they would basically forgo that that the free loan to the government just to avoid the

audit but um you know I was just I was just wondering because you know every tax year it’s such a waste like it’s just such a waste of resources and you know it’s like you don’t see much good coming out of it it’s just like you know it’s like just so so wasteful you know and just so I’m just but um you know again it’s I’m sure there’s you know but uh here’s another question I have for you is um this uh idea where um this you know what are the biggest mistakes for business owners and um that they should avoid uh well I mean that’s a big question so you know for you know the way I look at it obviously taxes is going to be uh either your largest expense or maybe your secondar expense if maybe if you have a big labor component um so you know not taking the

time to actually fix that is I think going to be the largest uh largest issue because so you know we’ll we’ll kind of across the board you know we’ll we’ll we’ll look at somebody’s situation we’ll do what we call a survey call we’ll say okay you know based on the numbers you telling me we think we can save you you know 20 grand 30 grand whatever it is and you know so that’s that’s great and all but the important thing to remember is that this is every year right so if you’re saving and this is like cash in pocket right so if you’re saving 30 grand a year it’s like well if I then turn around and invest that or you know it could be invested in anything you know real estate or stocks or crypto whatever um you know what what is the opportunity cost of not doing that over

your working Lifetime and you know if we’re talking 30 grand a year it is enormous so whatever business that you’re in you know at some point you’re going to retire right you need to build a portfolio you need to uh invest for the future because Social Security assuming that it’s there is not going to cover much it doesn’t cover much now and it’s it’s scheduled to run out of money here in in a couple years um so you know you have to build that that asset base for yourself and you know I I have a lot of doctor clients and doctors are great at earning money they are terrible at keeping it so yeah oh yeah I’ve got one guy I’m thinking of in particular he buys a new $120,000 car every year and um you know it looks great but you know what do you get what are you putting

aside so you know that’s that’s an issue and that you know if you go back to um a Millionaire Next Door you know Thomas Stanley was talking about that yeah uh so you know it that that money that you’re giving up to the government by by not paying attention is you just a a lifetime opportunity cost that you’re missing out on that you know is going to be like seven eight figures you know come retirement age so to me that’s that’s the mistake uh people make and and it’s really just a matter of taking the time it’s like we get so busy doing the thing that we’re doing uh that we we don’t take the time to operate at the management level and uh part of our tax strategy with with our monthly meetings is to actually set aside a day and go over your books and review your business

and then just you know improve on what’s working and decrease what’s not working and then you know that spread over time will increase or improve your your business and give you the time to step back and really make those strategic level decisions so uh it’s just it’s just critical to actually do that level of work yeah I love that um so yeah like I said uh you know tax planning tax strategy these are kind of um you know if you ow I guess if you owe taxes that’s um you know that’s a quality problem but you know of course if you’re like in the you know the tens the hundreds you know hundreds of thousands you know the millions of you know that’s a big number so and you don’t really see much come out of that so um how can people contact you and reach out to you

check out your business Etc yeah best thing to do is go to tax sha.com and uh you’ll see a link at the top book an appointment and that’ll that’ll get you on our calendar with uh one of our staff one of our tax experts and we we have a four a four-part approach so we have uh the survey the route the track the compass check so survey is when we sit down with you we kind of go over your situation we’ll say okay what’s your fi what’s your uh family situation you know what’s your income what’s your expenses what do you have currently as far as entities and all that kind of stuff so that’s just establishing where you are the route is figuring out where we can go it’s it’s the map you know how do we get from here to there what strategies do we need to implement do we need to

create new entities do we need to put the kids on payroll do we uh want to set up a charitable foundation and then the uh the trk is actually getting there so that’s that’s doing the work uh you know implementing all these things and then like everything else in life things change right so our Compass check is our updates you know that we sit down usually quarterly uh sometimes twice a year just kind of depends on on the situation and we we review and we say okay you know what’s going on are We online with our projections is revenue up is revenue down you know and then just making those tweaks along the way so that by the time you know tax season comes around the next year that we are in a good position that you know good or bad is relative you know as far as you

know if if you’re paying 100 million in taxes it probably feels bad but you know at least you’ll you’ll have a defined thing and you’ll meet your expectations that’s that’s really what what we are going for is to to to map out the road ahead and then actually end up where we think we’re going to end up now obviously even uh I have a call later today with uh with client even with all the projections that we do throughout the year we still overpaid by $18,000 so he’s getting a refund not terrible uh but uh no matter how good our projections are they’re never going to be perfect right because things are going to change last minutes it’s like Oh Christmas was bigger than we thought it was going to be uh or it was less than we thought it was going to be so that’s going to change our year- end

numbers so you know it’s always going to be something like that but but we’re in we’re in the a pretty tight band as far as what our expectation is yeah so uh so yeah but tax.com is the best way uh we’ve got a Blog we’ve got um you can go to my YouTube and and check out uh usually weekly calls that we do so the last two weeks uh I’ve been ill but uh usually every Tuesday we do a like a Q&A kind of thing of just answering questions that have come in from clients over the last little while and uh we stream that on YouTube and Linkedin and and Facebook I think yeah um but yeah that’s that’s the best way and um you know everything the the difficulty with the tax world is that everything depends it’s it all depends on your situation what you have going on what’s true for

you is not necessarily going to be true for your neighbor so uh we have to examine what’s what’s going on in your particular situation and then what applies to you yeah it’s almost like a being a doctor like you have different you have very common conditions but every patient is different and you know genetics and all that so or or somebody uh call I found this white pill in my cabinet what is it that’s every pill that doesn’t help yeah exactly yeah um excellent and for like I said uh for all the audience be sure to give Neil a like and follow on his socials check out his website his Services obviously not this year but following and um and with that thanks so much for coming on to the podcast and you know the time to plan is always now yeah exactly it’s uh it’s

never too early to get started on on setting up for for the following year all right well excellent excellent um all right well um like I said I have a fast turnaround so um you know your episode will release uh in the next few days and um I’ve given you a five star review already I think but if not I will and I’ve um I’m really growing on uh YouTube and um LinkedIn in and Twitter so we love to connect with you there but um yeah absolutely yeah excellent and um any questions or anything or anything or no I mean this is fun I think yeah yeah pretty pretty easily yeah I’m going to uh actually I’m just filling out this uh five star review now yeah I I am new to pod match you’re actually my first podcast match so yeah I’m not quite sure

what to uh what to do here I guess I click confirm yeah yeah confirm I think I followed you on all your stuff but let me just double check okay let see pod match it’s gonna I just followed you on LinkedIn I’m GNA follow you on Instagram follow and then Facebook okay all right okay so I did my five stars there so should be yeah and uh I was uh I was actually on your YouTube channel earlier this morning oh okay excellent do all the follows and the thumbs ups and yeah all the things you got 1.19k Subs that’s good it’s uh yeah I’ve been on YouTube a long time so if you go back in the archives there’s all kinds of random stuff but yeah but yeah it’s it’s half tax stuff now well excellent excellent all right well uh thanks so much and uh

thanks for connecting yeah absolutely all right we’ll see you on the streams see you all right have a good one