Neal McSpadden on Solving $1.3M Tax Debt and Solopreneur Advanced Tax Planning

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Welcome to the From Battle to Business Podcast. In this podcast, business coach and fellow veteran Dean Van Dyke will bridge the gap between service and civilian life, helping guide veteran business owners to supercharge their business and unlock hidden profits. You wouldn’t go into battle alone, and now you don’t have to in business. Let’s get to it. Welcome back, this is from Battle to Business with your host, Dean Van Dyke. And today I have Neil McSpad. Neil was pushed into the tax world when he started receiving letters from the IRS saying he owed over $1.3 million in taxes. That’s $1.3 million in taxes. If I fix in his own problems, he discovered the world of advanced tax planning and has brought those skills to solo printers, anything to contractors and small business owners. Welcome, Neil. Hey there, good to be here. Well, thanks for joining. And 60 seconds or less, tell us who Neil is.

Yeah, so I am an entrepreneur at heart. Business has been my life since the year 2000 or so. And like you just read, I got myself into tax trouble and got myself out of tax trouble. And in doing so, I’ve gone into this whole world of advanced tax planning. So, you know, it’s become my mission to help independent contractors, small business owners, solo printers. That’s what I call my tribe. Help them keep more money in their pocket and less in the government. So, I hope I understand how does one get into, you know, $1.3 million in back taxes without getting, actually, let me start it this way. Why doesn’t the IRS notify you when you hit, I don’t know, $50,000 in back taxes? So, well, that’s what those letters are. That’s that first notification. So, what happens is, well, there’s many different ways to do it. So, in my particular case,

I was doing stock trading at that time. And at the end of the year, you know, I went through my numbers and like most day traders, I lost money. And so, I had thought that I didn’t need to file any taxes because I didn’t make any money. Turns out that’s not true. So, what happens is if you don’t file for a couple of years, the IRS will file what’s called SFR, substitute for return. And they will take whatever information they have on you from third parties, like $10.99 and WTunes and whatever else. And they’ll put together an automated version of a tax return using the worst possible set of assumptions. And if they go through that calculation and they decide, oh, you would have gotten a refund, you will never hear from the IRS. But if they go through that and they decide that you would have paid them money, then you start getting letters.

And that’s what had happened to me. So, like most people, when I got a national letter from the IRS, I stuck my head in the sand and I ignored it. And I ignored it, ignored it, ignored it. And then eventually, it gets to the point where, you know, if they’ll start sending you certified mail and if the number’s big enough, you’ll start getting phone calls from revenue agents. And then after that, they’ll start garnishing whatever they can find. So, in my case, I was actually pretty broke at the time. So, they didn’t, I didn’t have any bank accounts, I didn’t have a boat, I didn’t have anything they could really go after. But they did have a paycheck. So, they started garnishing my paycheck. And at that point, I was forced into fixing my problem because I couldn’t afford a pay rent. Well, I think it’s funny. Maybe it’s tragically funny. Maybe it’s

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even a tragic comedy. So, they don’t notify you if you got a refund coming. So, what happens is that if you owe them, they have up to 10 years to go back on you. That’s the Session Limitations federally. Most states follow the 10-year role as well, but California has unlimited. So, they have up to 10 years to go back on you. And for you to claim a refund, you have three years. So, right now, as we’re reporting this, it’s the end of 2024. You know, taxes for 2021 were filed in April of 22. So, that’s the next year that’s coming up for expiration in April of 25. So, you have three years on them, they have 10 years on you. And, you know, guess who makes three lose, right? So, by the time you get one of these letters in this particular process, it’s already passed the three-year point and there’s nothing for you to get.

Wow. Why doesn’t that surprise me? I got, you know, why are the rules created? And then maybe built for the government? Yeah. Maybe? Maybe. You know, we can only speculate as to what their motivations are, but that doesn’t seem to be the way it plays out. Yeah, it does. And it’s always tough to be a small business owner and try to, I guess, you know, go to battle with the IRS or try to play judo with the IRS or, you know, just jost with them. That’s probably not a wise idea of it. So, I noticed on your website, and I laughed actually when I read this, but I think I know why, but so why is the magic answer to tax questions? It depends. Yes. You’ll hear the same answer from accountants and lawyers and all people and that kind of, it depends. And in the tax road,

we call it facts and circumstances. So, what is true for you may not be true for somebody else. So, you know, with, you know, with combat pay is a good example. So combat pay is generally non-taxable, right? It’s a little bonus that the government gives for you. Everybody else, yeah, everybody else getting that same W2 has to pay tax on that. You know, and a lot of times it can come down to intent behind that action. So, my favorite example is cosmetic surgeon. Let’s say you get a nose job, right? You don’t apply to surgeon, you need a nose job. There’s a cost for that. Let’s say $5,000. Now, the question is, what is that $5,000? And the answer is, well, it depends, right? If you got a nose job because you just didn’t like your nose, that’s not a deduction. It’s not a medical deduction, it’s not a business deduction, it’s not anything. It’s just money you spent.

If you got in a car accident and they did that same nose job in order to reconstruct, you know, how your face looked, then that is a medical deduction. So, you know, the activity was the same, but the circumstances around it and the intent behind it were different, and that causes different treatment for tax purposes. So, the big one that’s coming is, and I harp on this a lot, is 1099Ks. So, if you go out to dinner and you put the bill on your card and you’re with a bunch of friends and they give you money on Venmo or cash app or any of those, and that adds up to more than $600 over the course of the year. There’s a new rule that is going into effect, that you’re going to get a 1099 form at the end of the year from cash app, or Zelda, or whoever.

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They’re going to say, you know, Joe received $2,000 through our platform, and they’re going to notify you, they’re going to notify the IRS. And so, you know, the question becomes, well, what is that money? You know, if it’s income, then you have to declare it as income. But if you went out to dinner and your friends paid you back, that’s not income, that’s a reimbursement. Maybe it’s a gift from grandma, you know, who knows. So, you know, all these things are the same amount of money flowing through the same platform, but the reasoning behind it changes how it’ll be taxed. So, you mentioned gifts there, gifts of money. We’ll just keep it simple. Her answer. Yep. Aren’t those technically income? No. Is it at a certain level they become income? So, to the recipient, no. What ends up happening is that the recipient of the gift never paid taxes,

and assuming it’s an actual gift, the payer or the giver of the gift might pay taxes, depending on how much it is and what the total circumstances are. So, let’s just keep it to money because that’s when you involve property and things, things get complicated. But there is a lifetime exclusion amount of how much gifts you can give, and then there’s an annual filing threshold. So, basically, under current rules, I’m going to round numbers here, so I’m going to get into the weeds. But basically, you have 11 million bucks that you can give away during your lifetime. And that changes year to year, and it changes depending on legislation. So, right now it’s about 11 million bucks. If you go above 11 million, then that amount above 11 million will start to be taxed at the state tax rate. So, if you hear about death tax, if that’s what they’re talking about.

Very few people pay that, and most people, their total lifetime value that they end up giving away either through inheritance or through a just year to year giving is way, way less than that. So, if any one person can give any other person $17,000 a year and not have to report anything, if you go above the $17,000, then you have to file a form, a gift tax return, and say, hey, I gave Joe $20,000. That’s going to keep on my file for the rest of my life. And so that when I die, my inheritance is going to be shrunk by that $20,000. So, it’s very rare that gifts would be taxed by anybody, but sometimes if they’re larger amounts, you’ll have to file a form. Got it. Wow. Okay. Now, in a way, it depends. So, what are some of the, so as a small business owner,

there’s always, you know, tax law changes year to year, and there’s no way to keep up with it. At least says a small business owner, unless you’re an accountant, such as yourself or a CPA, which that’s your job. So, but as a small business owner, what are some of the challenges that that we face related to taxes? Yeah. So, the biggest challenge I find with small business owners is having, having the starting point defined. So, what I mean by that is that most small business owners operate kind of on a day-to-day basis. They wake up, they’re doing whatever it is they’re doing. You know, there’s a million different types of small businesses out there, and they get so caught up in doing their thing that they’re not managing their business like a business. And so, part of that involves like doing your books. So, most small business owners, they’re operating out

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of a bank account. They look at the bank account, they say, oh, there’s $3,000 in there. That’s good. I can go out and go do stuff. Or they wake up and they look and say, oh, there’s $300 in there. I got to go make some money. And so, it’s just very reactive. And they are not, you know, if what I asked them, I said, okay, well, how much money did you make this year? And they don’t know. How much did you spend this year? They don’t know. So, that’s step one or step zero, even. You got to define where your business is. And most people fall short right at that first step. So, only once you define your starting point, can you figure out where you want to go? So, you know, we’re the re-tactual. So, you always look at it in terms of like navigational

themes. So, we have our survey, figure out where you are. And then we have our route, which is mapping out where we can go from there. And then we go off of the track where we actually put into the into place all the steps of getting from point A to point B. And along the way we would check our compasses to make sure that we’re still on track. So, so that’s that’s actually the biggest problem is figuring out where you are right now. There I’ve seen plenty of cases where a small business owner will will come in and say, well, you know, I made this amount of money, $50,000, $100,000, whatever the number is. And I spent that amount. So, I should be good. And the answer is maybe, right? It depends. What did you spend it on? It’s like, well, I bought a house. It’s like, okay, but that’s not a business deduction, right? So, even if you’re in the real

estate, this is it may or may not be a business deduction. So, like everything, it depends. And the front end work of doing that, of that keeping up with the management of the business is actually the most important part. Because from there you can start to make decisions, but you have to have good information. Garbage in, garbage out, right? Pretty much. So, so I know I’ve made some mistakes when it comes to taxes, but what are some of the biggest mistakes that business owners make when it comes to taxes? Oh, there’s so many. Let’s start with the top five. Top five. So, top five is probably business structuring problems. So, there are 29 million Schedule C filers in America, as of 2022 in this. That’s probably 28 million, 900,000 too many. So, Schedule C is the worst way to file as a small business. And still, three-fourths of businesses file that way. And there’s

a couple different reasons for that. One is that it’s the highest tax way to go. And the other is that it’s the highest audit way to go. So, it’s the highest audit risk factor. On any, anything you do, it’s the highest audit risk factor for a tax return. So, that’s step number one. And typically, what you want to do is you want your business to be filing its own tax return. And then there’s different forms. There’s S Corporation C Corporation partnership. But you want to do that. One, it just lowers your audit risk. And two, it’s generally more tax efficient. So, that’s thing number one. Thing number two is that they don’t do any proactive planning. So, again, you got to figure out where you are first. Instead of just waiting to the end of the year and say, oh, here’s my numbers. But that one is too

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late to do a lot of stuff. And then the other thing is not so much tax related. But, well, it actually becomes tax related. Is that the, none of us are going to own our businesses forever. We’re all going to exit at some point. Either we’re going to pass away, or we’re going to retire, or we’re going to sell the business. And nobody or not nobody, but very few small business owners really have that end destination in mind. And so, having a larger plan, again, it all comes back to where are you and figuring out where you want to go with all this. Having a larger plan in place of saying, okay, I want to build my business in this way. And with this end destination in mind, and then managing the tax picture along the way. So, an example of that is that I got one client

who is a software business. And he’s trying to grow that. And eventually, he wants to sell that business just as a complete package, basically. And so, we talked about the options. And there’s two basic different kinds of sales when it comes to business sales. There’s a stock sale, and there’s an asset sale. Most businesses sell as asset sales. However, if you can manage it, there’s a huge incentive to sell stock if you have a SQL version. And that’s called a 12 or two exclusion. Basically, you can make 10 million bucks tax free, which is a pretty good incentive. It’s a pretty good payday. Pretty good payday. And there’s requirements around that and all the kind of stuff. But we talked about the different options. And he said, I want to try that one. I said, okay, it probably won’t work because most businesses don’t want to buy stock. But

we can give it a shot. And don’t make an educated decision. He’s like, yeah, I understand that. But we have these other strategies in place to deal with the year to year. And then I have this potential big payday. So having that exit in mind when you start is really, really helpful. And so that you’re not just left at the end, trying to figure out what it is that you have or what could you do at that more limited place because you didn’t plan out on the front. Right. So what is that? That free so far? So I think so. Yeah. So the next one is not taking advantage of tax free cash flow strategies. And there’s a bunch of these. So there’s accountable plans. There’s medical reimbursement plans. There’s there’s meeting strategies. There’s there’s a bunch of different ways to to elevate things into business expenses that previously might not have been. And so it’s a

way to effectively get cash or tax free cash flow out of your business, which is great. And then probably the fifth one is these get tied together is optimizing for the qualified business income deduction and optimizing on your retirement. So you know, if you’ve been in service for 20 years, you know, you have some guaranteed retirement options already. But when you’re in the when you’re in the private sector, then you know, pensions effectively no longer exist. And you’re you some kind of defined contribution plan like a 401k or an IRA or something. There’s different flavors. So and those all tied together with how much you end up taking as salary or payroll or self employment at the end of the year. And that ties into what was created under the Trump tax reform, which is the qualified business income deduction. And that gives you up to a 20%

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break on your past or income. So if you if you make a hundred grand from your business, you might only be taxed off 80 of it, which is great. It’s a huge incentive for small business. But everything gets tied together with the payroll and that gets tied in with their time. And so it’s a it’s a a bigger picture that you have to look at it as far as how the mass goes. And it gets complicated. But you know, not not being aware of these things and not taking these these plans into effect are costing small business people huge amounts of money. So you know, your typical small business person, well, when we add up state and federal and payroll tax, you’re generally paying about 40% which is how to yeah, which is way too much. So yeah. So you know, part of my mission is to

bring that way, way down as much as possible. And and you can do that as long as you plan ahead. So going to your go into your tax person once a year and say, here’s my papers. There’s limited amounts we can do with that because things are already passed. Yeah, once December 31st rules around you’re pretty much other than what what can you get a credit on an IRA maybe. Yeah, you can do that. You have up to April generally to to get those in. Before one case can be can be applied past the end of the year, which is similar to the IRA thing on the employer side. And so yeah, there’s there’s a couple tweaks we can make sometimes like recharacterizing one thing versus another, but we’re definitely hamstrung by that point versus what we can do on the front end. So the moral of the story is talk to your tax professional in January one. Well, January second,

you can give them January one off, but then if we bridge a whole of them on January second, because that kicks off your tax season, which gets crazy. Yes, this sure does. Yes. So typically we want to see our small business owners, you know, quarterly to kind of you know, go over current state of affairs. Has anything changed? Are we in line with projections? You know, do we have to make any adjustments? That kind of thing. That makes it to a sense early rather than later. Yes, I mean, yeah. So come me we’re rapidly approaching January one 2025, which now kicks in a new compliance rule for small businesses that didn’t exist before and it’s to depending on who you talk to, it’s what depend it’s to prevent fraud to prevent money laundering because you know, that’s what small businesses are in the in the business to do is to

launder money and I know NSA is probably listening right now or maybe there. So this kicks in January one 2025 for existing businesses, new businesses this year they had to comply. So tell us a little bit about that new compliance rule that small businesses have to comply with. Yes. So it’s interesting and it’s a process that’s under active development. So there was a law passed a couple of years ago called the Corporate Transparency Act, which had this provision in it where small businesses and I don’t understand why but big businesses are exempt. Small businesses have to report to what ended up being Finz and the Financial Crimes Enforcement Network beneficial ownership information. So you’ll see these referred to as DOI reports, beneficial ownership information. And basically anybody who has a 25% interest in a company or an LLC is supposed to report this information to the to the Finz and it’s it annoys me on several

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levels. So it annoys me on the first level because none of this information is new, right? You file a tax return, your information’s already in there. You file with the Secretary of State to form the company, your information is there, your driver’s license, which they also want is, you got a driver’s license from a government, a state government, a some sort. But they wanted all in their little collection plot so they don’t have to go to the state and actually get a warrant or something. And then this is always in the same vein as, well, the people who are going to comply with this are not going to be the people who you need to look at. But it’s a very open question as to how effective this will be. So what ended up happening though is interesting. So a coalition of small business owners, there was like an industry trade group, they brought suit

against the federal government on this. And this a judge ruled back in March that this was unconstitutional. So the Treasury is the Treasury Department is under appeal with that. And the government is saying that well, that unconstitutional rule only applies to the members of that particular industry group that were in that lawsuit. They always try to limit it. Right. And I’ve read the judge’s decision and I’m like, that’s not how the constitution works. If something is unconstitutional, it’s unconstitutional for everybody. But I’m not a lawyer, so this is not legal advice. But it seems on very shaky ground at this point. But it is an area that’s under appeal. So we’ll see what happens. So the penalties if you don’t do this, and there’s no tax associated with it, it’s just filing a report. And penalties if you don’t do it are severe. It’s like hundreds of

dollars a day. And you know, the states, so I personally have received a couple of notices from from different states, Secretary of State saying, look, hey, you know, it’s time to submit your report to the government, to the feds. And so, you know, we’ll see how it all shakes out. But the the governing bodies of accountants and stuff, they’re all recommending, well, the recommending two things, the recommending that people comply. And they’re also recommending that the government not pursue any enforcement actions because this legal status is unclear. So, you know, your audience can take that for what it’s worth. You know, maybe talk to your attorney about it. But it’s very unclear at the moment how that’s all going to end up. That makes sense. Yeah. And then the bigger, maybe not the bigger problem, but a other problem that, you know, occurs to me is, you know, for anybody who’s concerned about

personal information out there, they’re creating a giant honeypot of information of all business people in America in one place. Yep. And so, you know, the feds don’t have the greatest track record at data security. So what? Really? It’s shocking. Who knew? So, I don’t know how good an idea it is to have a massive database of all these people’s information and drivers licenses and all this kind of stuff. Yeah. So it’s interesting because, you know, you think compliance in general, is there like a number out there that conveys what is the actual cost to small businesses to comply with all these? I’ll be nice. These wonderful rules that really shouldn’t exist. Yeah. So there have been different attempts to quantify that done. If you look at the instructions for different forms, on the fine print, on usually one of the last pages, sometimes it’s in the

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front, there’ll be like a paperwork reduction act notice. And they try to estimate it’s like, well, the average person filling out this form will take two hours and 37 minutes or whatever it is. And so, you know, obviously you’re filling out a lot of forms. And, you know, either you’re paying somebody to do that for you or you’re spending the time doing it yourself. Right. And it’s a lot, whatever the actual number ends up being. It’s, you know, it’s probably hundreds of hours and thousands of dollars and or thousand dollars one way or the other. Well, it takes you an hour and a half, just to read the instructions and then another half hour to familiarize yourself with the actual form. And then it’s like, okay, I’m calling somebody else to do it. It just because it, when I was in the military, I mean, a lot of the forms were not friendly. And you had to make

sure you read it or read it correctly because if you misinterpret something, check the wrong box, well, then, you know, doors slam shut and red lights go off. And so it’s, it’s just, it’s one of the things where, you know, one of the challenges I had one year is our son was in college. And he was under 25. And I forgot to check the box that he could be marked as a dependent. On his form, I think, yeah, on his form. Yeah. And in my accountant, and I said, hey, listen, I think I made a mistake here. So I went back and tried to refile it and they wouldn’t let me refile it. They wouldn’t let me make any changes to mine. And the accountant was like, is what it is. I guess you’re not getting credit for him this year. And so we just stopped. You know, we could

I could, I’d probably sure. I think they did amend it finally. But it was a nightmare trying to get that, get that fixed because they don’t make it easy. No. And, you know, I’ve got hundreds of cases of, you know, similar kinds of issues where it’s like, yeah, okay, even if you do amend it, it takes them three months to process it. And then like in your case, one would have to be amended first. And then you could amend the second one. We, you know, got through that with clients before it. And then, you know, sometimes they’ll lose the stuff that you send them or they don’t get it. They lose it’s crazy stuff. They lose stuff. They, so my, my, one of my sons actually, I never understood, you know, he, he, he joined the IRS as a revenue agent. He lasted 12 months.

And he said, this is not my culture. This is not who I want to be. And he left. And he, it’s just some of the stories he said that he told us. I was like, whoa, I wouldn’t want to be part of that organization either. So it’s, it’s, it’s, I guess whenever you hear those three letters, you know, or you see the letter in the mail, it’s like, oh, what do we got now? And it’s always, hey, you know, it’s hardly ever a check, you know, made out to the person I’m seeing it. But, well, hey, this has been fine. I’ve got a couple more questions for you. And one of the questions I love to ask is what are three book recommendations you would have for the listeners? And please don’t say the IRS tax code. No, I read that so you don’t have to.

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But yeah, so, so as far as books go, you know, I find myself focusing more and more on helping small business owners on the operational side. So from there, two books to read definitely, if you haven’t already, is the EMF by Michael Gerber. And there’s like, there’s EMF revisited and mastered and whatever sort of any one of them are by. And then profit first by Mike McCalowicz. Mike, so those are two really good books as far as operating your business from a management level. So then you spend at least a little bit of time, you know, at all working on the business that have ended this. So those are two for sure. And then the third one, third one, fairly more subjective as far as like personal taste goes. But I would have to say, you know, I know it’s trite. A lot of people think it’s, you know, overly simplified, but,

you know, rich day board is probably the single book that has changed the most lives when it comes to small business people. It is definitely a wall three of them are very powerful. Yeah. You know, the EMF and profit first. And because one of the you know, one of the key tennis with profit first is pay yourself first and distribute the money, you know, throughout the various accounts that you’ve got. And and then EMF is I talked to a lot of business owners who they’re like, I can’t find the time to work on my business. That’s and so they just run and run and run. And then the end of the day, they can’t figure out, hey, what just happened? Where’s all our money? Oh, the IRS took it. No, I’m kidding. But no, I would agree. I’ll three of those books are great books to read. And so where

can my audience go to find out more about you and the wonderful work that you’re doing? Yeah, the best thing to go best thing to do is to go to taxshurper.com and you can go to taxshurper.com slash battle and you can get a year end kind of get your house in order sort of checklist. And you know, that’ll help you get ready for the upcoming tax season. So that’s probably the best way, you know, otherwise you can always just go to taxshurper and book an appointment with one of our tax experts to go over your personal situation. But I would say start with the check list. Go to go to taxshurper.com slash battle. Awesome. So I’ve got I actually do have one more question for you because the name of your company is so intriguing. Where did you know, tax I get, but the shirt apart, where did that come from? Yeah. So that was not my invention. I

wish I could play in it. But you know, it comes from the fact that it comes from the fact that, you know, we do more than just the file stuff, right? We want to be the guy to help people achieve their financial goals, especially with their small businesses. And so, you know, we got together and we came up with with the shirt, because that kind of encapsulates, you know, a shirt brought is not just going to tell you where to go. A shirt actually goes along the trip with you. And that’s really what we wanted to convey. So we’re there to help you along the way. That makes its sense. And I, you know, when I heard taxshurper, I was like, oh, that’s so interesting. And of course, then we get to the end of it. And I’m like, hey, what’s that question I want to ask?

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Well, that’s great. So no, it’s been great having you on as a guest and learning about, you know, how we can, you know, improve our tax strategies and the compliance aspect to it. And but one of the things I love to do is give my guests the final words. So I’ll let you close us out. Yeah. So, you know, everybody who’s in your audience and from battle to business, you know, if you’re in business for yourself, which we all are at one level or another, even if you have a day job, you still have a business selling your services to your employer. You want to be focused on the business as a whole, rather than just getting stuck in the day to day. I think that’s the most important takeaway. When you can operate at that strategic level, then you can talk about all the different tactics of how you want to implement this or that, but you got to know the higher

level first. And if you can do that, you’ll get to where you’re going to last. That’s true. That is very true. Well, again, thank you so much for being on the show, Neil. It’s been great. And thank you for all the wisdom when it comes to taxes. Thank you. It’s great to be here. Thanks for listening. In order to help others, please subscribe and share this show up with other veteran business owners in your network. If you want specific guidance, feel free to book a complimentary call with Dean at deanvandite.com. Remember, you wouldn’t go into battle alone, and now you don’t have to in business.