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Welcome to episode 225 of Love, your Money! This episode is a continuation of the opportunities that exist to save you, the business owner, money and headaches with proper tax planning and preparation. Or, in the words of today’s guest, “No April Surprises.”
Tim Thompson is a CPA and Certified Profit First Professional. He enjoyed a 15-year career in manufacturing and operations with Fortune 100 companies and also owned a small family business. Now, he helps his clients understand their goals and creates comprehensive plans that reveal and diffuse income tax landmines before they suddenly appear.
Today, we’ll discuss the biggest challenges that business owners face with income taxes and how planning throughout the year and not just before the tax deadline reduces stress about your tax bill. You’ll get great advice on how to become your tax professional’s favorite client and why AI, ChatGPT and social media shouldn’t be your “trusted” tax advisor.
Here’s what you’ll find out in this week’s episode of Love, your Money:
- The biggest complaints that business owners have with taxes.
- Avoiding April surprises by planning all year long.
- The power of good oversight of your money.
- The difference between bookkeeping and taxes.
- How to be your tax professional’s BFF
- The worst tax advice on social media
- Tips for handling a tax audit
Inspiring Quotes
“Communicate back with us when we're trying to communicate with you because that can be a two-way street for sure. I know accountants don't communicate well but we need people to communicate back with us pretty quick so we can put stuff to rest.”
– Tim Thompson
“Don't do it just because you read it on social media. Ask questions. And if you don't understand what the savings are, don't do it. It's just like anything else in life. Don't do an investment that you don't understand. Don't take a tax position that you don't understand. Understand it and then do it.”
– Tim Thompson
Resources and Related to Love, your Money Content
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Transcript
Hilary Hendershott: Welcome back to Love, your Money with me, Hilary Hendershott. Today, I have an exciting, exciting guest. His name is Tim, and he is a tax professional. So, today’s episode is a complement to last week’s episode where I talked about how to understand your tax preparation and filing as a business owner. Today, Tim and I are going to continue on that same topic. Tim, just to give you a little background about him, took a unique path to becoming a tax strategist after a 15-year career in manufacturing and operations with Fortune 100 companies and even a small family-owned business, he noticed everyone seemed afraid of taxes. Maybe you resonate with that. He shifted to public accounting to blend his operational expertise with tax skills to help small business owners. By understanding his client’s true goals, he creates comprehensive plans that reveal and diffuse tax landmines. Wow. We’re going to find out more about those. And his motto is, “No April surprises.” Some people have April showers, May flowers. You have no April surprises. Tim works with clients year-round to confidently minimize surprises in taxes through proactive planning and education. Welcome to Love, your Money, Tim.
Tim Thompson: Hey, thanks for having me, Hilary. It’s great to be here. Kind of an oxymoron, though, to be exciting and have a tax prep.
Hilary Hendershott: That was kind of what I was getting at. Although admittedly, I get excited about what’s possible when you fill out the tax return right and you get it all done and you feel good when it’s submitted and it’s like that’s all done. I don’t have to worry about that anymore. But you and I have one thing in common, and that’s that we’re both Profit First Certified Professionals.
Tim Thompson: Absolutely.
Hilary Hendershott: So, what do you love about being a Profit First pro?
Tim Thompson: You know, that’s a great one. It was funny because I’ve read that at the recommendation of a client of mine back in 2020 during COVID, and I noticed this client was killing it, and he had referred me to other competitor businesses that they’re all franchise operations. They weren’t doing as well as he was and I just said, “Hey, what’s the deal here?” And he said, “Have you ever read Profit First?” I said, “No, I haven’t.” And he said that somebody had told him about it and compared it to the Dave Ramsey envelope system for business and he knew I’d been a Dave Ramsey provider here in Dallas County moons ago. So, I said, “Yeah, I’ll pick it up.” Now, I read it and I told Mike, I said, “The only thing it ticks me off is you wrote the book and I didn’t,” because I’ve been trying to do the same thing for clients but I was doing it from the wrong direction. I was doing it like a customized solution for every person and his was just a simple structure.
Hilary Hendershott: Yeah. That book changed my thinking, although I had already developed basically at the identical system for myself in my personal accounts years prior. And then I had a similar reaction when I read the book. I thought, “Man, I should have written this book.” But of course, Mike Michalowicz did it better than we would have, right?
Tim Thompson: Right. And he tells funnier stories on his audiobook. Well, funnier stories than me.
Hilary Hendershott: He does tell good stories.
Tim Thompson: Yeah, for sure, for sure.
Hilary Hendershott: So, Tim, the biggest complaint I hear when people talk to me about their tax professional is and I think people are really grappling with this right now is like it’s February, March, or beginning of the year. I’m kind of regretting. I told myself last April and May that I would create some tax strategies. I would do my best over the course of the year but my tax guy never told me what to do. I have no idea what I can deduct, what goes on, what card. I hear about things like the 179 deduction or the Augusta rule but my guy never talks to me. So, explain to my listeners why they have that complaint and what they can do about it.
Tim Thompson: Well, A, they’re not alone because that’s pretty much the thing that we hear for every prospect we get across our door. The industry traditionally just doesn’t communicate and I hate to put a boilerplate stamp on that but we’re not great communicators a lot of times. We’re just great math magicians and try to make things stick. But that doesn’t excuse it by any stretch. And that, honestly, is one of the reasons I got into the business is because what was it the, it’s a StrengthsFinder, right? I think that was the one that was out 20 years ago when I took it. I’m a relator so I can relate just about anybody from, you know.
Hilary Hendershott: Relator was on my top five as well.
Tim Thompson: Does it really? Yeah. So, I was a relator so I can come down to the welder on the plant line. That’s why I was in manufacturing all the way up to the boardrooms of the Fortune 100 companies and anywhere in between. And I can talk to somebody and try to relate to them. And so, what I think that people needed somebody that can relate with them and I don’t relate with everybody. I’m not everybody’s cup of tea. I don’t try to be and don’t claim to be but I think a lot of times the stereotypes for the accountants being very, you know, they can stare at their own shoes but not yours. And that’s how you know you have an extroverted accountant is they’ll look at your shoes instead of their own. I think that runs rampant. It’s really bad. And so, the last thing they want to do is communicate with people.
They really want to hide behind screens or whatever but at the same time, there’s also an old mentality in the business that I’m charging you for the preparation. I’m charging you this fee for the preparation of your return. You’re using my expertise to know how to do things. Obviously, paying for software costs, labor costs, all of those kinds of things. You’re not really paying me for advice. You’re paying me for a transaction. I’m not sure if I can say this here but I used to joke that I felt like a hooker because I would see people once a year for one service, and then they’re gone.
Hilary Hendershott: You can say that. That’s funny.
Tim Thompson: Can I say that? I was like if you need to cut that out, go ahead. But that’s really what – it’s a very transactional business if all you’re looking for is that tax return to get done. But honestly, I’ll tell you I’m sure people say the same complaint about our firm in that if they’re not investing in the advisory piece of our firm, they’re probably not going to get a whole lot of feedback. Yeah. We’ll talk to them during tax prep time but it’s just like the scenario you laid out, “Oh, I was going to do some stuff back in March or April but my person never did a thing about it to follow up.” Well, to the industry, the fact that they had a passer-by comment at the time they’re reviewing your tax return with you was the advice. And if you want to execute on it and need help, call us and we’ll set up a different arrangement for that.
Hilary Hendershott: Well, so how does that look for clients of your firm? Because, yes, the tax return costs X and the bill comes in April or October. But if they want advice, how do you charge for that? How do they receive it? What is the method of delivery?
Tim Thompson: So, we’ve got a package I set up really because of this very common complaint that it’s just an advisory level package that says, “Hey, look, included in that is your tax prep but we are forcing three meetings a year. We’re going to meet you once around tax time because that’s when it’s freshest on your mind. And then we’re going to meet…” And listen, that can vary from February 1 to October 14 for people. Okay. I prefer not to have the October 14 people. FYI.
Hilary Hendershott: I’m surprised you get to say yes to those.
Tim Thompson: That’s why I have to disappear for a couple of weeks after October 15. No, not really. But it really is we meet with you then because you’ve spent as much time as you can looking at last year. Now, once we’ve had somebody in our cycle for a couple of years, we don’t have to spend much time looking backwards because the other two meetings that we have throughout the year are really looking either the very present or definitely looking forward. I tell everybody we meet that once around tax time and then another time in the summer. And why? Because it’s not a really good time for us to talk between February 1 and April 15. But give me a week or two to kind of get my wits back. And then May 1, we’re going to start meeting with people and we talk with them all the way up through the end of June. And we have these hour-long meetings where we’re exchanging information. We may take homework back from those and come up with some other ideas.
A lot of times we’re saying, “Hey, last year looked like this. How’s this year looking? And where do you want to go with this? Are you thinking of selling the firm? Do you need to buy a house?” all the questions that need to get asked so that we can know how to position the taxes going forward. And then we do another one. Kind of most firms do this one I would say but November-December time frame, which traditionally has been, “Can I buy a new truck?” but it really is, “Can I spend some money here?”
Hilary Hendershott: Well, tell people why. Yeah.
Tim Thompson: Can I spend some money? I don’t even have drawers on this desk but the guys that would put the checks in the drawers and that cash home and all that kind of stuff because they didn’t want to have revenue at the end of the year, that kind of thing. They got the greatest January on the planet. But, yeah, the November-December thing is, “How much do I need to spend or how much do I need to pay myself? How much can I withhold?” We do a little trick where we obviously run some big payroll checks at the end of the year to compensate for that tax bill. Remember, no April surprises. So, we want to make sure that we’ve covered that tax bill as early as we can in the cycle but as late as we can in the year. And so, that way when April rolls around, it’s not a surprise.
Hilary Hendershott: And I just want to make sure I understand. I think I know what you mean when you say you run some big payrolls in November and December but I’m definitely quotable as saying don’t spend money just to not pay taxes. But you’re talking about paying the owner.
Tim Thompson: We’re talking about paying the owner and utilizing that to accomplish two things. Let’s say we’ve got an S Corp or a C Corp and they’ve got to meet that reasonable compensation number and maybe they haven’t all year. They’ve just been taking money out as draws or whatever. We run that payroll. We’ve already kind of got a predetermined tax bill that we think they’re facing. And we put that in and say, “Okay. Well, at least I mean, I may pay you $100,000 payroll but we’re sending it all to the IRS as your tax payment.” That’s one element of it. It’s usually not that simple. Usually, we’re taking a look at, “Here’s where the P&L is. What do you think December looks like?” We plug it in. And the other trick is we usually get our tax software around mid-November. And so, we can literally play with real live data. It’s not all final but we can play with pretty live data and go, “Hey, we think it’s coming in this way. What do you want to do about it?”
And it may not be that we pay the whole bill, pay the whole tax bill in December but you’re in control now. You know that if I only pay this much in, I’m going to owe this much in April, potentially. And that just empowers people to do what they want to wisely. I had one client that wanted to buy $1.5 million worth of inventory. And we just sat there and took a look at her numbers and said, “Yeah. You can do it. You can afford to do it because I think we’ve covered your tax bill.”
Hilary Hendershott: Oh, so at the end of the year, she’s wondering, “Do I have enough left to buy a million and a half in inventory and pay my tax bill?”
Tim Thompson: Yeah. I think she was catching some good deals at the end of the year with reduced inventory cost. So, that’s what she wanted to do.
Hilary Hendershott: And that’s the power of having good oversight of your money and not doing budgeting by bank account balance.
Tim Thompson: Right.
Hilary Hendershott: So of course, in April at tax time there’s inevitably in my practice upsets about the tax bill. Of course, those people aren’t working with you. But the converse of that is the number of people after working with us, and we have clients we’re working with together, who for the first time have the cash in the bank to pay the tax bill so it’s not an upset. It’s such a win for people, they feel so proud of themselves, right?
Tim Thompson: I did.
Hilary Hendershott: I knew what the bill was going to be. I paid it, it’s done. I’m not in debt to the IRS, right? And it’s like, I never want to try to sell people on that because they never come to us for that. But it’s inevitably a pat someone on the back on the shoulder and congratulate ourselves kind of a moment. So, I know you like to contribute to that. So, what should people be looking for in their tax preparer? There’s a slew of acronyms and designations. And I’m also kind of a big thing I hear people say is, “I got to get my taxes into my bookkeeper.” I really hear people call their tax person their bookkeeper, and I always call it tax preparer. So, tell me, what do all those words mean?
Tim Thompson: Well, I’ll tell you. You know, that’s interesting you said that because I remember sitting in a breakfast with the guy years and years ago and he said, “Hey, I’m on the phone right now with my bookkeeper.” And I thought, “Wow. I don’t think this is going to be a good fit.” There’s a lot of people out there that just don’t know what better to call them, I think. There’s definitely a difference between, in our profession, there’s definitely a difference between those levels of service. I think you and I’ve talked about but the listeners don’t know this. I steered my firm a much different direction than others. And as any startup firm, you take whatever business can fog a mirror, right?
Hilary Hendershott: Typically.
Tim Thompson: Yeah. Typically, you do and it’s like, “You know what? I really don’t like this.” I’m married to a school teacher so she’s off in the summer. And guess what? Tax time kind of happens at the same time school is in. And so, if I want to disappear in the summer, I can. So, I structured the firm around that. I don’t disappear the whole summer but structured the firm around that so that I could focus on taxes when it was time to do taxes. And when it’s not time to do taxes, I can focus on tax law rather than catching up months’ worth of bookkeeping. Because that’s what happens to a lot of small CPA firms is they’re doing everything. Mike talks in one of his books about the double helix trap. You’re either selling or doing, selling or doing in the small business world until we’ve scaled and have other people doing for us. Well, that’s what I was doing. I was either selling or I was doing taxes, selling or doing taxes. And when you add bookkeeping into that, I was either selling, doing taxes, or doing books.
Hilary Hendershott: You have to tell people. What do you mean? Tell people what the difference is between bookkeeping and taxes.
Tim Thompson: So, for the small business owner, it’s literally the debits and credits or every check written, every deposit that came in. It’s processing it and getting it into financial statements so that the tax preparer can do it so that a banker can make a decision on whether or not to give you a loan so that a business evaluator can give you a business valuation. You’ve got to have good, strong books..
Hilary Hendershott: So, it’s the person running your QuickBooks.
Tim Thompson: Yes, pretty much. If you’re on QuickBooks, it’s the person that’s doing QuickBooks transactions.
Hilary Hendershott: And are there designations or licenses that are required for that?
Tim Thompson: No, there’s not. There’s not any, no. You know, there’s a lot of people who call themselves bookkeepers and they’re not all great. I’ll tell you that. Just like there’s a lot of people that are CPAs and they’re not all great. Okay. So, finding a good one is really important because they need to understand your business and understand traditionally where the debits and credits need to go.
Hilary Hendershott: Okay. So, a bookkeeper is separate from a tax preparer. You there, it’s possible and in fact, it’s common that tax preparers have bookkeeping in-house.
Tim Thompson: Absolutely. A lot of traditional firms do that, a lot of times because they want that monthly recurring revenue and it’s very important to them. And as the businesses scale, they can certainly do that. Like I said, I totally went off-path. And I said, “You know what? I want to be one of the best tax people I know.” So, I’m going to go this direction and I’m just going to study taxes when it’s not tax season. Yeah. That’s exactly the direction I chose because I don’t want to be distracted by bookkeeping. I still have two or three legacy folks out there. The guy that introduced me to Profit First, I’m never going to get rid of the guy. He’s going to have to get rid of me.
Hilary Hendershott: He changed your life.
Tim Thompson: He changed my life because when I was able to pay my taxes that year, I was like, “Wow. This thing works.”
Hilary Hendershott: See, it works.
Tim Thompson: Yeah. It works. So, yeah, but literally everything else is geared around tax and tax preparation and the occasional tax resolution. But that is the difference between a bookkeeper who is debits and credits oriented like… You’re a business major, right?
Hilary Hendershott: Economics with an MBA.
Tim Thompson: Economics. Okay. So, somewhere in there you took an accounting class and you had debits and credits and the T accounts and all that kind of stuff. That’s what the bookkeepers are doing. The tax people are working then with the bookkeeper, with a set of financial statements to create that tax return.
Hilary Hendershott: What are the designations that people should be aware of when looking for a tax person?
Tim Thompson: In the US, CPA always. That’s the one that’s recognized because it’s, yeah, CPAs made itself a fixture in American business, I think. There are other designations. You’ll see on mine that I’ve got a CTP, certified tax planner. That’s a lesser designation. It’s not necessarily recognized globally or anything as, “Oh, that’s a US-certified public accountant,” when we say CPA. But CPA would be the one or when it comes to tax prep, there’s also an EA that doesn’t stand for executive assistant. It stands for enrolled agent. And I will tell you, after having put some people in this office through EA training, it’s no joke. Okay. A lot of times an EA will know more than a CPA does specific to tax because some CPAs aren’t really geared towards tax. Some CPAs are geared towards audit or…
Hilary Hendershott: Because CPAs do other stuff. Right.
Tim Thompson: CPAs do all kinds of stuff. So, if you find an EA that’s great. If you find a CPA, that’s great. Those are the two designations I’d look for.
Hilary Hendershott: Okay. How can a business owner make themselves a great client for you? So, they want minimal headache. They want to do the right things at the beginning of the year to get the right documents and paperwork to you. What’s your best coaching? You don’t have any clients that are listening to this.
Tim Thompson: I’m sending this out to all of them. No.
Hilary Hendershott: You should, you should, you should.
Tim Thompson: That’s right.
Hilary Hendershott: How can someone make their tax life, someone who just doesn’t want to get involved, they don’t really understand it, they trust you, how can they be your best client?
Tim Thompson: Well, so let’s go down that business path. If they have a bookkeeper but they don’t want the bookkeeper doing the taxes, right? So, the bookkeeper isn’t affiliated with the tax firm. Make the introduction. Let us work with them. Because we have a lot of those relationships, thankfully, because of Profit First. We have a lot of those relationships built up with bookkeepers nationwide that will talk to you, the bookkeeper, to get all the detail stuff, the stuff that makes the business owners’ eyes roll in their head and will involve that business owner as much as they want to be involved. Usually, they don’t want to be involved a lot but we have a couple that they want to be super involved. They want to be copied on every communication. We’re not talking behind anybody’s back. We’re just using accounting jargon because it’s how we know how to talk. And then that preparedness, making sure that bookkeeper or those sets of books are ready to go come tax time, that’s the biggest thing.
You march in here on March 10 or March 15 deadline, and I’m going to tell you, it’s going to be an extension. In fact, if you march in here on March 1st, it’s probably going to be an extension because we’re not going to get it done. So, I think understanding that, number one, the matriculation to CPAs or didn’t come out of calling being CPAs but the matriculation of people with accounting degrees that are pursuing CPA has gone way down. People in our shoes that have that designation or a lot of times retiring out, it’s an aging out thing.
Hilary Hendershott: And this is how you and I met because I was…
Tim Thompson: Yeah, exactly. Exactly. That’s right. You were…
Hilary Hendershott: I was hurting trying to find a good tax person.
Tim Thompson: That’s right. So, yeah, that’s exactly right. And so, it’s definitely a dwindling industry. And listen, the idea that AI was going to take over tax returns anytime soon is really I think it’s a long ways out there. Will it happen by the time I die? Probably.
Hilary Hendershott: Maybe. So far it looks like in my business AI is making us better at what we do.
Tim Thompson: Yeah.
Hilary Hendershott: It makes me a better financial advisor, right?
Tim Thompson: I don’t disagree. I’ve used AI to ask particular tax questions occasionally and not necessarily trying to trip it up but I want to see what’s out there. And sure enough, you’ll get something that is just flat-out not right.
Hilary Hendershott: And you have to know that it’s not right. And even if it gives you an accurate answer, you have to know how to apply and use that answer.
Tim Thompson: Absolutely. Absolutely.
Hilary Hendershott: Gosh, I forgot what question that was. How could someone be a great client for you?
Tim Thompson: Oh yeah, they’ll talk about AI in the middle of your sentence. No. Just kidding. Are we going to cut that part out too? No kidding.
Hilary Hendershott: No.
Tim Thompson: By the way, I would like for them to have a sense of humor. That would work a lot for me because in this business, it’s very difficult.
Hilary Hendershott: I think most of the work is gathering information for you in the beginning of the year, all the various 1099s and documentation of income and all that. Right?
Tim Thompson: Yeah. And one of the things that we will set up with people is like, “Look, if you’re the type of person that wants to send me a document every time you receive one, I want you to rest assured that we’re not going to touch your tax return until we know we have everything because of efficiencies.” Right? The time spent just opening a tax return is ridiculous for everyone. But there are some people, “Go and get this, so you can get started.” We’re not getting started until we’re mostly complete. Now, do we hold off waiting on that last K-1 to come in? No, I mean, we’ve got some pretty extensive tax returns that have a lot of stuff going on, and we just kind of hope that, well, in the process of this, maybe that K-1 will come in but if it doesn’t, then we can come back and do that one or two things at the very end. Totally fine. That’s not a big deal but we’d really like to have as complete of files we can upfront. That doesn’t mean that we’re not going to ask questions.
And this is another thing I want everybody to understand. And I think it must exist out there for how many times I get asked or… We’ll just say that I get asked this question. It’s like, “Will I have a chance to review my tax return before you file it?” Oh, man, who files returns without going over them? You know, I can’t even imagine that that happens out there but apparently, it does.
Hilary Hendershott: Maybe that’s an H&R block thing, I don’t know.
Tim Thompson: It might be so. I don’t know. I’ve heard it. I’ve heard it from people and that they come in and they go, “Well, will I have a chance to look at it before you file it?” “Yes. We’re going to need you to look at it quickly. We’re going to need you to respond to us, especially if we’re coming up against a deadline. We don’t have to file it on March 5 if we have it done by March 5. We can hold it until April 15 if you want us to but don’t wait until April 15 to review it.” And so, it’s really that. Communicate back with us when we’re trying to communicate with you because that can be a two-way street for sure. I know accountants don’t communicate well but we need people to communicate back with us pretty quick so we can put stuff to rest.
Hilary Hendershott: It just doesn’t make sense to me to hire financial professionals and then not respond to them.
Tim Thompson: Right.
Hilary Hendershott: It’s like I’m not trying to sell you something. I’m trying to help you solve your problem that you hired me to solve.
Tim Thompson: That’s right. That’s right. So, yeah, scarcity makes the heart grow fonder or something like that, right? So, anyway, but having a complete file or as complete as possible when they come on and, listen, some people operate that way. They want to be able to pop one thing at a time. We designed our system for them to be able to do that, and we just have a little button that they’ve got to press and say, “Okay. I’m ready.” And when they hit that button, bells and whistles go off here and streamers start flying around and we’re like, “Okay. Let’s get to work on Hilary.” So, it’s really not streamers, just in case you thought that was real.
Hilary Hendershott: No. I’m quite sure you’re not awash in streamers by April 15. Talk to me about the other day I was watching a social media, an Instagram reel or something. And this person says on social media, “I feel sorry for other business owners who talk about paying taxes when I have five legal entities set up to pay taxes, and one is just a tax shelter.” And I’m thinking to myself, first of all, what you just said makes no sense. Second of all, you just said that on social media. Do you think the IRS doesn’t have Instagram?
Tim Thompson: Right. The bull’s eye on that guy’s picture.
Hilary Hendershott: But if I turn the tables a little bit because I’m an expert in personal finance but I’m not an expert, for example, in marketing. I’m good at marketing but I’m not an expert, and I can’t tell you the number of rabbit holes I’ve gone down because someone that I think I trust says something on social media produced a result for them that I want for myself. And then I’m like, everyone wheels off the bus, everyone stop what you’re doing to my team, right? We’re now doing this launch method and they’re like, “Oh God, not again.” And it turns out to be a huge waste of time. So, I know in the case of the social media tax post that I just mentioned to you that that’s nonsense. So, I know that that person is not only not probably doing an accurate return and putting themselves at risk of an audit but the people listening probably don’t. What’s the worst tax advice you’ve heard on social media?
Tim Thompson: Oh my gosh.
Hilary Hendershott: Just top three.
Tim Thompson: You know, I’ll tell you. I’ll tell you the thing that I think is the most upsetting because it is so rampant out there, is that there’s a lot of people that will push S Corp status in a social media blast.
Hilary Hendershott: If you’re not an S Corp, the wealthy know. The wealthy are born into an S Corp.
Tim Thompson: That’s right. Exactly. And it’s like, okay, time out because S Corps are good at a certain level. I mean, I’ve got several. I love the structure of it but it’s not necessarily several clients, not several myself. I have a bunch of clients with S Corps.
Hilary Hendershott: I’m glad you clarified that. I was like, “Do you really?”
Tim Thompson: Why would you do that? And so, no but literally it serves a certain spot. There’s a sweet spot for S Corps, for sure. When the Tax Cuts and Jobs Act passed, we had like dust off our manuals for C Corps again because all of a sudden that could make some sense. But the advice out there that everything you do should be an S Corp, I will not advise somebody to put anything into an S Corp unless it makes sense for them to do it. I had a startup in here one year and I kind of breathed a big sigh when I get a startup because most of the time, startups are underfunded. They don’t have a lot going on and good luck making any money. Somebody told me I should be in S Corp. “What do you think I should do?” And that’s like, “Let’s wait until you’re putting 80K to 100K on the bottom line and then we’ll talk about it.”
Hilary Hendershott: Right. I know. I love it when people want to go form the LLC before they have any income.
Tim Thompson: Well, they do that S selection right now, it’s like just time out because, ethically, I’m going to at least fee you for an extra S Corp, for an extra return that’s not needed. And you need to be clearing that payroll tax savings just enough to pay for at least that and some other administrative costs you’re going to have. Now, can we make some money on this? Absolutely by saving taxes. But until you’re at that point of matter, well, this guy comes in and I think he was, I mean, he was wanting to do the same thing. And I was like, “Okay. Are you sure about this?” Dude’s first year was 4 million top line. I had zero idea this is going to happen and we had done his S selection because he demanded it, not because I thought anything by it and his business plan didn’t… He blew out his business plan. He thought he was going to do a million and a half. He did four. So, is there a place for it?
Hilary Hendershott: That’s a good problem to have.
Tim Thompson: Yeah. It was a great problem to have. And the first time I’d ever seen that in my life, for my business. This was 7 or 8 years ago. So, there’s a time and place for all of it but don’t do it just because you read it on social media. Ask questions. And if you don’t understand what the savings are, don’t do it. It’s just like anything else in life. Don’t do an investment you don’t understand. Don’t take a tax position that you don’t understand. Understand it and then do it.
Hilary Hendershott: Agree, agree, agree. Okay. Last question. And if you don’t have any, I understand but everyone is really curious about tax audits. So, I told people in the last week’s episode how you get to a tax audit, which is you file a return that the IRS doesn’t like. Do you have any juicy audit stories since you’ve seen the inside of a few of them?
Tim Thompson: I will tell you the one that I loved the most when they came around. It was actually my mentor for years, always had great income. And prior to me…
Hilary Hendershott: Your tax mentor got audited?
Tim Thompson: No, not my tax mentor. My business mentor, my life mentor, really. I met this guy in the 90s. And so, I’m thinking to myself, “Don’t send him a copy of this podcast.” Anyway, just kidding. So, he was always making pretty good money. He was in the car business, owned a few dealerships, and that kind of thing. Always made pretty good money. But his wife, who I love to death, had had some issues with cancer and that kind of thing. And so, their medical bills would always be pretty high. And for those that don’t know, medical can be very hard to claim. Everybody’s talking about, “Hey, can I write off my whatever?” And it’s something medical and God forbid…
Hilary Hendershott: Unlikely.
Tim Thompson: Yeah, God forbid you can write it off because it has to clear 7.5% of your adjusted gross income before the first dollar can even help you on your itemized deductions page. Okay. Well, they’d spent 60,000 or 70,000 one year on medical. And I don’t know what the top line was but let’s say it was a couple of million bucks. I have no idea. Just going off pulling one out. There’s no way he qualifies. 7.5% of that, no way he qualifies. Next year, he has an off year. Okay. Ones are negative.
Hilary Hendershott: Oh, so he tried move the expenses?
Tim Thompson: No. No, he didn’t move the expenses. She had two or three years’ worth of cancer treatments. The same $60,000. Okay. And they audited him on that second year saying that they didn’t agree with his medical expenses. It’s like, “What are you talking about? Did you look at last year? Because there were 60 on last year too.” And so, I went through the process with him and I said, “Okay.” They’ve called us in for, I forgot they called the, it was an examination here locally in Dallas. And I said, “Listen, I want to document every bit of this.” And they went to work. Got me doctor’s bills, pharmacies, any hospital stays. They got the whole list, everything that was out of pocket. We scheduled it. I learned this from the guy who taught me how to be a practicing CPA. We document it like I assume lawyers document stuff. We have binders full of stuff, everything tabbed out. We said, “This is tied to this number. This is tied to that number. This is tied to that number.” I walked in and there was supposed to be…
Hilary Hendershott: Gosh, but it’s taken you so long.
Tim Thompson: Oh, it did but you know what? So, I go in and we found out that we had missed a few expenses like another 10,000 or so once we did all the digging. So, there was that. There was that.
Hilary Hendershott: We actually want more back.
Tim Thompson: Yeah, exactly. So, I walked in. I handed him the binder. Now, what was supposed to be a two-hour examination, I was done in ten minutes. And she said, “I wish all your CPAs were this organized.” I was like, “Thank God I learned my lesson from somebody who’d done it before.” And I said, “They’re willing to say we’re not going to amend for that extra 10,000 medical. You got to drop the stuff.” She said, “I will send you a no-finding letter in a matter of a couple of days.” And sure enough, within 2 or 3 days, no finding letters. That’s not juicy but I’m telling you, if you get an audit notice, number one, they probably have been trying to find you for a while, so don’t ignore the letters when you get them. But when they do, do an examination, just make sure you can back it up. If you can’t back it up, don’t put stuff on there for deductions because they will come.
Hilary Hendershott: And that backs up exactly what I said in last week’s episode. So, thank you very much. So, finally, the last thing I like to do in our conversation today is introduce the beautiful guest who’s actually behind you on the wall because people I’m sure are wondering, who is this amazing woman whose face is almost as big as the hosts?
Tim Thompson: It’s a big picture. I had it blown up.
Hilary Hendershott: Tell us about Shelby.
Tim Thompson: She’s awesome. She is the love of my life. And to toot her horn a little bit, last year, she won a big, a big prize that we’re paying taxes on this year for being one of the top three teachers in the United States. So, she got recognized. We got to go to Hawaii, and we had a great time.
Hilary Hendershott: But wasn’t she on Good Morning America?
Tim Thompson: Oh, yep. She was on Good Morning America.
Hilary Hendershott: I’ve been trying to get there for years. Shelby just did it.
Tim Thompson: Well, I mean, it was GMA 3 but I’m not going to take that away from her but, yeah, she’s fantastic and great with kids. The contest was called Teach the Love. And I mean, you’ve met her and you saw her in action.
Hilary Hendershott: She teaches the love.
Tim Thompson: She teaches the love. She doesn’t worry about science nearly as much as she does about loving on those kids so pretty awesome.
Hilary Hendershott: Cute. Well, thanks for being on the show. And give Shelby my best.
Tim Thompson: Will do. Thank you.
Hilary Hendershott: How can people reach you if they want to find out more?
Tim Thompson: Oh, gosh. Let’s see. The easiest one is TimThompsonCPA.com. On our website there, you can just come in. There’s a spot up there. I think it says, “I want Tim to do my taxes,” or something like that. They can click on that.
Hilary Hendershott: Tim Thompson in Texas does taxes.
Tim Thompson: Tim Thompson in Texas. I know. Let’s just make it a little bit more.
Hilary Hendershott: We’ll put all of your links in the show notes for today’s episode, so people can reach out and find all the places where you are. Okay?
Tim Thompson: Okay. Great. That sounds great.
Hilary Hendershott: Thanks for being here.
Tim Thompson: Thanks for having me.
Disclaimer
Hendershott Wealth Management, LLC and Love, your Money do not make specific investment recommendations on Love, your Money or in any public media. Any specific mentions of funds or investments are strictly for illustrative purposes only and should not be taken as investment advice or acted upon by individual investors. The opinions expressed in this episode are those of Hilary Hendershott, CFP®, MBA.