Josh Bauerle, CPA is a tax accountant and founder of CPA on Fire. Josh worked in a wide variety of accounting and advising positions prior starting CPA On Fire in December of 2012. His passion is working with entrepreneurs to help them maximize their profits and minimize their tax liability.
On this episode, we dive into the following topics:
- What should ecommerce sellers that are just starting focus on in terms of taxes
- What is one of the top tax write-offs that is overlooked?
- What entity is better for a seller just starting to build a business, LLC, S-Corp?
- At what point is it better to transition from an LLC to an S-Corp?
- Top 3 tips to save on taxes for ecom sellers
- What are your thoughts on letting Amazon handle sales tax vs. applying for state nexus and doing it yourself?
- Are there any opportunities to save money on sales tax?
- What would you say to someone that says “I didn’t make any money from my start up this year, therefore, I am not going to file a return.”
For your tax accounting needs, reach out to Josh here: https://cpaonfire.com/contact-us/ (tell them we sent you!)
Remember what made you successful as an entrepreneur, persevere, you’re gonna hit obstacles. you’re the kind of person that made things happen. That’s what’s gonna get through this. You have to have patience, you have to have perseverance. You got to tap into every resource you have available. You got to know what these government programs are, how much you have access to get to get your hands on any bit of money that you can cash is huge right now, any type of cash reserves you have are huge. And it’s just, you know, what’s what’s the next right thing to do day by day.
Welcome, everyone, to the firing the man podcast show for anyone who wants to be their own boss. Sit in a cubicle every day and know you were capable of more than join us. This show will help you build a business and grow your passive income streams in just a few short hours per day. And now your host serial entrepreneurs David Schomer and Ken Wilson.
Welcome everyone to the firing the man podcast today we interviewed Josh hourly who is a CPA and the founder of CPA on fire. Josh is a specialized tax accountant for e commerce entrepreneurs. And we had an excellent conversation with them. Ken What do you think about the conversation?
Yeah, you know, this the interview we just did with Josh is crushed it, man. I’m super excited to bring that to the listeners, you know, Josh covered so many topics that are, you know, that are complex, you know, like, you know, tough to understand and he just kind of simplified it all. And you know, he covered PPP and EIDL and tax implications of those. And there’s so many other topics, but what are some of the other ones?
Yeah, I would say that that one thing that Josh did does an exceptional job of is making really complicated topics. easy to understand. For instance, we went down a rabbit hole on sales tax, and specifically collecting sales tax on Amazon and he provided some really good explanation there. He also had some great comments on extracting money out of your business. Through a salary or a bonus. And lastly, he talked about sole proprietorship versus a partnership versus an LLC versus an S Corp. And which one of those entities makes sense for what type of entrepreneur and so, this was an excellent episode, and I really think the listeners are going to enjoy it. Enjoy. Alright, welcome, everyone to the firing demand podcasts. They were joined by Josh Bauerle. Josh, welcome to the show.
Hey, thanks for having me.
Absolutely. I think First things first, tell us a little bit about yourself.
Sure. I’m a I’m a CPA, I founded a tax business called CPM fire. We work primarily with online entrepreneurs. So a lot of e commerce sellers, podcasters bloggers, basically anyone who makes their their living entirely online. I spent a lot of years working in CPA firms and financial advising firms and the big thing I saw at that time was that there was a lot of small business As owners who weren’t being serviced properly, they were kind of stuck in between of going to like a chain shop where they got no help, or having to pay crazy fees to big time CPA firms where they’re kind of just the low man on the totem pole that that wasn’t paying the hundred thousand dollar a year fees and just kind of still getting basic service. So it’s all neat there and kind of started a business that would target these people and give them the help they needed. And it took off pretty big from there. And now we work with a lot of the bigger names in the online world.
Very nice, very nice. Now, what prompted that? Were you an online seller as well? Or why did you decide to get into this niche? Yeah,
so I was not I really didn’t even know much about the online entrepreneurial world at that time. I knew I wanted to work with small business owners. So that was the first thing. But early on, I listened to a podcast called Entrepreneur on Fire where he was just interviewing online business owners, and I reached out to him was like, Hey, I am a CPA. I have my own tax business. If you ever need a guest on You’re entrepreneur fire podcast, I’d love to come on. He’s like, Hey, I don’t need to guess. But I do need a CPA. So I started working with him and his podcast blew up really quickly. And he sort of had me on once a month to do a tax tip. And that’s just kind of how the niche formed. Naturally, from there, I became the guy that work with online based businesses. So it’s kind of coincidental and a little bit of luck, but it worked out. Well.
Very nice, very nice. But a lot of our listeners are either have an existing e commerce company or are just starting a e commerce company. And so I would say early on in that growth stage, taxes are not on people’s mind. And so what would you say in terms of, of just getting yourself set up, right, what are some considerations when that someone should take when they’re starting their business to set them up for good tech strategy?
Yeah, and I would say I see a lot of people in two different camps. People who aren’t concerned enough about taxes when they start up or people who are overly concerned and don’t even get started because I got to figure out all this tech stuff. So I think the proper balance is somewhere in between. I know that taxes are going to be a thing with your business, but don’t not get started because you’re worried about optimizing that. A few things to keep in mind right from the start that the biggest thing to me by far is you have to have some type of accounting system. So you’re recording that income coming in those expenses going out. It can be as basic as a spreadsheet that you’re recording everything. Personally, I can tell you that any any tax preparer you use is going to prefer that you use some type of accounting software, whether it’s zero QuickBooks Online way, GoDaddy, there’s a million options out there, I’d suggest using one that’s cloud based, it just makes your life easier. But my biggest advice right from the start, get something in place. So you’re recording everything that goes in and out of your business. On top of that, set up separate accounts that’s going to make that recording even easier, right Don’t use your personal bank to be buying the stuff you’re needing to get this business started and don’t use that to have money come in, have these separate accounts so that you know everything that goes in and out of that count as a business transaction can make your your your bookkeeping easier. It’s gonna make it easier if the IRS ever asked questions, it’s gonna protect you legally if you ever form an LLC, so keep those separate accounts. And finally, somewhere early on, start to get some type of business entity whether it’s an LLC, whether once you start making some money, LLC taxes, an S corp, but look into it, figure out what the right one is for you figure out what type of legal liability protection you need, figure out where you’re at tax wise and get some type of entity set up.
Yeah, I I’m glad that you brought up the legal entity. And if we could dive into that a little bit more for those who are unfamiliar So to me, it seems like there’s three routes can’t tell me if I’m wrong. First being sole proprietorship, second LLC and three S Corp. Is that right?
Yeah, absolutely. There’s a three night I guess if you want to add one that equivalent to the sole proprietor if you have a partner just be a general partnership, which is the same as a sole proprietor but you have a partner
So, okay, can you walk through each one of those and talk about which one might be a good fit for what type of person?
Sure, so a sole proprietor or a general partnership, the partner basically you’re not doing anything to set up an entity you’re just hitting the ground running, you’re saying I’m setting up my account on Amazon whatever, I’m gonna start selling I’m gonna start making money and it’s, it’s totally fine you can you can absolutely do that. Some people think they have to have an entity or get some type of business license to get started and that’s not the case if you just want to go you have an idea you ready you want to hit the ground running you can do that you can have a sole proprietor for for tax purposes it’s basically treats you in the business as one in the same alright so it’s gonna get reported directly on your personal tax return as a Schedule C. Legally, there is zero legal protection you in the business are again, one in the same. So if and I’m not an attorney, some There’s gonna be over basics here, but in theory someone sues the business they’re suing you personally. So that’s that’s generally the drawback with a sole proprietorship is you have personal exposure legally. The next step up is the LLC. And a lot of people are surprised to learn the LLC actually offers zero tax benefits. It’s the exact same thing as a sole proprietor when it comes to taxes. Right, the IRS calls an LLC, a disregarded entity. So if you form that LLC, and you’re the only owner, it’s gonna be treated exactly the same as when you are sole proprietors can be on your personal return on your schedule C. The difference is it offers that wall of protection between you in the business so you have your business here you have you personally here, there’s a wall in between that, in theory, someone can sue the business and not get your personal assets. And again, talk to an attorney. There’s always exceptions to those rules. There’s there’s a lot of ifs and ands and buts involved in the LLC. But that’s the general reason to form an LLC is to offer you some type of legal protection. The next step up from there would be to get to have Have your LLC and elect to have it taxed as an S Corp. And that’s where the tax benefits come in. So it’s again, what they call pass through entity, meaning those profits are recorded on your personal tax return. But it can save you quite a bit in taxes once you start seeing some serious profits in your business. So those are the general differences. There’s there’s a lot of nuances in between. But that’s that’s the general scope of it.
Is there a point at which it makes sense to transition from an LLC to an S corp?
Yeah, so we used to say, once you start profiting meaning, after you taking all your income, you deduct all your expenses. What’s left is your profit. Once that profit hits the 40 to 50,000 range, and S corp is a no brainer. That’s changed a little bit with some of the new tax laws and the the qbi deduction which we can talk about, I would say now it’s more in the 60 to $75,000 per year range in profits when that starts to make sense. There’s always you want to look at it individually. if you will. If you have a day job and you make a high wage in your W two job, then an escort may not make sense until much later. But generally speaking for most people, the 60 to $75,000 per year profit range. It’s one of those quarters to make sense.
Okay, and you mentioned cubii. Let’s jump right into that.
Yeah. So that was part of the new tax code in 2018, the qualified business income deduction, and the way this works, and again, this is for people just getting started this this, this is confusing, because I hear people all the time saying, Hey, I have this business, I made $100,000. But I didn’t touch any of it. I left it all in the business so I don’t have to pay taxes on it. That’s not the way it works, right. The IRS is gonna say, I don’t care whether you took all of it out, left all of it in, you’re gonna pay taxes on 100% of that income. So if you profited $100,000, and you left all $100,000 in that business account and didn’t touch it personally. You’re still personally going to pay taxes on $100,000. What the QB I did in 2018 is said, All right, instead of instead of paying taxes Hundred percent, you’re gonna pay taxes on 80%. So it’s an automatic 20% deduction. So you profit $100,000 you’re only going to pay taxes on $80,000, which is a huge deal. It was that that saved a lot of entrepreneurs quite a bit of money.
Okay, so that is in the cubii that is applicable to an S corp or any pass through entity. So
any of the three options we talked about is going to have access to that deduction. Okay.
Okay. Very nice. Yesterday, for Episode 33 of the firing man podcast. We had Anna hill from accounting, we will go and she talked a little bit about cash basis accounting versus accrual basis accounting and gave us some kind of an overview on the bookkeeping side. And one thing that I think most people would agree is if you can avoid paying taxes, then do it right. And so, say you do have that business and I know I’ve run into this Where I’ve built and grown a business for two or three years before ever drawing an income, but say you are have are showing, you know, at the end of November, you’re showing $60,000 in profit or they’re in you’re not planning on drawing any of that income for, you know, say a personal salary. Is there anything that you can do say like buy $60,000 worth of inventory that would lower your tax burden.
So that’s, that’s a big issue in the e commerce world. You can buy $60,000 worth of inventory, but you will not get a $60,000 deduction for that. Because you can only deduct the inventory that’s actually been sold at the end of the year. And that’s we have a lot of e commerce people get tripped up on that they do exactly what you said they think, alright, I have this money. I’m not going to take it out. Personally. Let’s lower my tax bill. I’m going to need inventory eventually. Anyways, let’s just buy a bunch of inventory. Now they find out at the end of the year, they don’t get a deduction for that. You only can deduct what you add actually sold during the year. And now they kind of used up the cash that they would that they’ll still need to pay taxes. So, there there are certainly things you can do that for. Let’s say that what do you mean, they maybe do a lot of picks up pickup and deliveries for e commerce business, right, and you need a new truck to do that. You could go buy a new truck, and that could drastically reduce your tax bill. You could buy a new computer for your business, there’s a ton of things you can buy that you’re using in your business that would reduce that tax bill. But inventory is not one of them. That’s a key thing that people have to know early on, or they can get themselves in a cash pinch.
So Josh, we’re talking about, you know, reducing taxes, what are some of the top two or three ways that you’ve seen recently that are working in econ space to minimize the
tax liability? Yeah, so number one, once they become profitable, the number one thing you can do is it’s one that S corp once you get to that rain, that can easily reduce your tax bill $10,000 or more once you start getting pretty high profits. So Pay attention to that know where your profits are, and know when to pull the trigger on that S Corp. Number two is making sure you’re maximizing that qbi deduction we talked about. So there’s there there’s some as with anything to actually there’s some nuances in that. And if you get end up getting too high income as a sole proprietor, you may phase out of that cubii. Were so you needed to make an S corp election on if you’re an S corp, you could phase out of it if you’re not paying high enough salaries to employees. So it is a basic deduction that 20% but there’s a lot of things that go into it. So you need to make sure you’re maximizing that and you know what you need to do to maximize it. And number three, I think it’s it’s really just knowing what you can and can’t deduct, right. So knowing that if you have a home office, you can deduct the home office and what goes into that home office. Knowing that if you need a computer in your business, you can buy a computer and deduct it even if you may be using it some personally. cell phone, internet, all this stuff that you use personally could be a partial or full deduction if you’re using in the business and if you know how to do it properly. Now on that S corp election, is that something that you need to do at the beginning of the tax year? Is that something that you can apply for mid year? How does that work? Good question. So there is a technical deadline of March 15, that you need to make it so if you want to do it for the 2020 tax year, technically, you’d have to do it by March 15. But they have a late election allowance. That basically if you elect it, let’s say November, and you say you won’t do it for 2020. All you have to do I say I meet all requirements of the S corporation except I didn’t elected on time. I didn’t know I needed to fill out this form, basically plead ignorance. I’ve personally, we’ve had 100% success rate and we do this at least 50 times a year. So I personally never seen it rejected. And the key there is you don’t want to do this too early. So unless you’ve already hit that profit level before the year there’s benefits Waiting until later the year to do it to make sure you’re going to hit the profit level where it makes sense. So I personally wouldn’t be afraid to wait until later in the year and and make that election I’ve never seen it not be successful when done properly.
Okay, a lot of our listeners, the path that they follow is they will have a W two jobs. And from a tech standpoint, that’s very convenient, where taxes are taken out of your paycheck and then usually at the end of the year, you file your return. And depending on how many allowances you have in other situations, you either get a small refund or small return pretty easy. Now some of those listeners will do very well in their e commerce business. They will fire the man get rid of that w two job and they are now you know either operating in an S corp or an LLC. And there are it’s not as convenient, right and so can you talk about making estimated tax payments versus waiting till the end of the year. And any planning that someone can do on the front end of firing the man just to set them up for no surprises at the end of their first tax year.
Yeah, so, a couple things with estimated payments. Number one, they’re not as people, they’re really intimidating to people because they think that estimated payments mean you have to file some type of form or return every quarter with the IRS is nothing you’re filing with the IRS, you don’t have to do a return every quarter, all you’re doing is making a payment to them each quarter. So it’s not near as difficult as it sounds. Number two, what you have to pay in quarterly to avoid any type of penalty is based strictly on what you had to pay the year before. So if it’s your first year making a profit, you probably don’t even have to make those estimated payments. Now, you still want to save the money, right? Because you don’t want to get to the end of the year and owe taxes and not have money to pay it. But you don’t have to pay the man if you didn’t owe the year before. Okay, and number two The biggest thing you have to do is set aside that money. So it’s ready to pay. And I know it’s, it’s, it’s confusing to know how much to do, I would say start with a minimum of 25% of your profits. Okay, so if you made $100,000 set aside $25,000 to be ready for for those taxes, that’ll put you in pretty good shape.
Nice. That’s a good good ballpark figure to aim at. So I want to switch directions a little bit and get into a topic that’s kind of recent this year, the PPP in the EIDL. So those are those are recent programs government released for the you know, the the pandemic and the economy. Now, are there in Can you discuss any, like tax implications for those programs or, you know, what’s upcoming on those?
Yeah, yeah. So PPP, the payroll Protection Program. That’s the big one. That’s a 100% grant if you use it properly, meaning you never know have to pay it back. Right and how much you got dependent on what type of entity you were, if you were a sole proprietor, it’s based on your profits a previous year, if you’re an S corp is based on the salaries, you pay yourself and your employees. But the key is you never have to pay that back as long as you use it for qualified expenses. And there’s that that what’s qualified expenses is still evolving. But it’s mostly going to come down to if you’re an S corp is going to come down to your payroll, how much are you paying yourself in salary? How much are you paying your employees and salary? On top of that, you can pay rent, you can pay your mortgage interest. If you have a building that you’re using for the business, there’s a few other qualified expenses. Now that they’ve extended out it originally, they said you had to spend all that money in eight weeks. Now. They’ve extended out to 24 weeks, there’s there’s really no reason anyone shouldn’t be able to qualify now. But you’d have to make sure especially if you’re an S corp, you’re spending all that money on salaries for you and your employees. But if you do that, you never have to pay it back. And it’s not taxable income. So it’s basically free money from the government. And I know that’s, that’s scary to hear everyone saying it’s free money especially. But in this case, it’s the truth. If you spend it properly, you will never have to pay it back. It will not be taxable income. I’m EIDL. So there’s two components of EIDL. There’s the grant portion. Alright, so for those who have already applied, if if you’re a sole proprietor, you’ve just got a flat $1,000 grant. If you have employees, you’re an S corp or have employees you get $1,000 per employee up to $10,000 total, right? That portion is a grant never has to be paid back. Nothing special, you have to do with it. not taxable income. All right, so it’s like PPP is just free money that you never have to pay back. On top of that, they offered a lot of people a loan. Alright, that again, is not taxable income, but you do have to pay it back and they should have went over the terms when you signed up for it. Of what that payback is. It’s delayed for 12 months, you won’t have to make a payment for 12 months, but that will be eventually paid back unless somewhere down the line. They scratch it and say everyone’s forgiven. But
we can hope for that. Right?
We can hope I mean, if that’s right, who knows, but right
every few months it changes
in terms of other programs or other thoughts or considerations surrounding this pandemic, and in some of the government funding programs, is there anything else entrepreneurs should be thinking about? Aside from the ideal and PPP loan?
Yeah, so those are the two big programs right now. The only other thing I would say is a lot of nurses didn’t know that. If there is if they’ve had a huge impact from the business and they’re not making any or as much money they can apply for unemployment, which which is hasn’t been the case in the past. So as a business owner, you can apply for unemployment. And for at least a little while longer you you get not only the state unemployment but the federal unemployment which is an additional 600 dollars per week. So you can get quite a bit of money on unemployment right now, if your business has had a big impact from the pandemic.
Okay, okay. And I think we’re going to see that in e commerce space. At the time that we’re recording this episode is July 16. And this week, Amazon made a big announcement on the amount of inventory that we’ll be able to send into warehouses in q4, which, at the beginning of this pandemic, I know personally, this caused some serious issues in my business and hoping to play my cards a little bit differently in q4, but I still anticipate this causing some issues. So yeah, it’ll be good to keep an eye out for that. What are you what are you seeing in terms of some of your e commerce clients? How are they weathering this storm?
Yeah, it’s I mean, it’s it’s tough. It’s, you know, everyone tells you as an entrepreneur, you need to be prepared and have stuff saved for a rainy day, but I don’t think anyone ever prepares for a pandemic and total global shut down. It. I mean, as far as impact has been all over the board, we have some clients that are completely unimpacted. And some that have been shut down through no fault of their own. And I mean, obviously a lot of it depends on what you’re selling, who your market is, what platforms you’re using. But it’s, it’s tough. And I think the only, the only thing the only thing that we tell our clients is you just remember what made you successful and entrepreneurs that to be a successful entrepreneur, you have to be you have to be persevere, you have to persevere, you’re going to hit obstacles. you’re the kind of person that made things happen. That’s what’s going to get through this. You got to have patience, you got to have perseverance. You got to tap into every resource you have available. You got to know what these government programs are, how much you have access to get to get your hands on any bit of money that you can cash is huge right now. Any type of cash reserves you have are huge. And it’s just you know, what’s what’s the next right thing to do day by day.
In terms of just entrepreneurs kind of grinding it out so day And I have been focusing on expanding into other sales channels, eBay, Etsy Walmart. Now I want to switch directions a little bit and go into sales tax and Nexus. So on why no, it’s kind of a Yeah, it’s a fun one. And it’s one that, you know, I’m not a CPA like you and David’s, like, What’s going on here? But so now you know, a couple of my brands are selling on three different channels now. Can you explain Nexus sales tax and what’s the current state of what’s going on there?
Now, the current state is chaos.
So net Nexus Nexus simply means that you have some type of physical presence in a state, which is going to require you to collect and pay sales tax to that state. And for most people, for most businesses, this doesn’t become an issue because like, they’ll say, I start a business in my town of Willard, Ohio. All right, and I’m doing taxes for people. I’m I don’t open office, any other They don’t have any type of physical presence there. Once it comes to e commerce, especially for like Amazon sellers go by Amazon. When you put inventory in that state, most states consider that Nexus because you have physical presence in the form of your inventory. And like Amazon, you don’t have any control. You can’t say just keep it in Ohio, so I don’t have Nexus in anywhere else. They’re gonna put it all over the country. Are they in every state? I know that last I heard they were like 40 something, but it’s pretty close. Yeah, so they’re either in all or almost every state. And there’s, if you do this long enough, your inventory is going to be in all those states, which means you have Nexus in pretty much all of those states. Now, that opens you up to do you Or don’t you have to collect and pay sales tax. Luckily, things are starting to evolve a little bit where they’re, they’re making Amazon take care of this. Amazon now requires in the majority of those states, Amazon has to collect the sales tax, Amazon has to pay the sales tax. So if you’re just using Amazon, you don’t have to Do anything there? That opens the next question. If you’re on multiple channels, or let’s say, selling on your own website on top of Amazon, what do you have to do there? That’s where it gets tricky, because every state is different. Some states say some states will basically treat Amazon like their own thing saying, alright, you have Nexus with Amazon, Amazon takes care of that. But you don’t have inventory from your own website in our state. So you don’t have to do anything else on top of what Amazon’s doing. Some states will say no, by virtue of selling on Amazon, you personally have Nexus here. So we want you to collect and pay for your website as well. So unfortunately, I have to say the answer that that everyone hates that CPAs have to say all the time, it depends. What I would say is if you’re a serious e commerce seller, you need to talk there’s there’s several businesses now that focus specifically on sales tax. So Pizer is a big one that we send all our clients to, they will do an analysis for you and say, Okay, these are your platforms you’re on. This is where you’re selling. These are what these states say. This is exactly what we believe you should be doing. And that’s the best thing I can tell people to do. Because it’s it’s the Wild West out there in the sales tax world.
For people just getting started, is there a materiality threshold where at a certain point, you should start worrying about that or say reaching out to a company like poisoner?
Yeah. So, again, it depends on the state, some states have higher ones than others. Um, if you’re just selling on Amazon, I would not, and you’re just getting started, you don’t have to worry about it. Amazon overwhelmingly is going to take care of it. And you’re not going to be high enough in the other states to have to worry about it. If you’re selling on multiple platforms, and you’re starting to see, I don’t know what specific sales number, but you’re, you’re starting to have some good sales on all your platforms, you need to reach out as early as possible. It’s better to catch this early and catch it late. Because what someone like Python is going to do is say, hey, you’ve actually had Nexus here for the last two years. And what you’ve probably should be doing is going back and saying, Hey, I had this I didn’t pay it. Here’s the money. That’s the worst case scenario because normally sales tax, you’re collecting it from the customer and then paying it. So you’re not using your own money. If you have to go back two years, you’re spending all your own money because you never collected it. So my best advice here is, is talk with them as early as as possible and catch it before it’s too late.
Okay, Josh, I did a deep dive on one of my own brands recently, and I think it was the month of April that I was looking at, and when I looked at my p&l that month, my Amazon fees just seemed high, higher than what I thought they should have been. So I did a deep dive on everything I was being charged in Amazon. And turns out, there are a couple FBA fees that needed corrected. But I did find that in that particular month, 1800 dollars had been taken out for sales tax. And so I looked at all of those sales that required sales tax being taken out, and I pulled the inventory report. Where I saw where all of my inventory was at to see where I had Nexus. And there was about 30 states in which I have Nexus in meaning that there’s 20 that I don’t, and presumably won’t have, or won’t need to pay sales tax there. And so when I looked at it, I think it was like three of 300 of the 1800 dollars that, you know, there may be opportunities to save money on sales taxes, and I just I know, that’s kind of a very specific and in depth question, but is the juice worth the squeeze in terms of reaching out to some of these states and applying for? I don’t know if you’d call it a waiver, or is that something you’re just better off letting Amazon take care of all of it.
So if it’s, if it’s Amazon, collecting automatically, you won’t have the option. So there’s some states that said, we don’t care about the seller, we don’t care about their Nexus, we’re treating Amazon as the seller. And if Amazon has a sale on our state, you will close And you will pay it. If that’s the case, that’s actually good news because Amazon’s going to collect that sales tax for you, and then pay it for you. So it’s nothing coming out of your pocket, you’re collecting it from the customer and then paying it. Obviously, there’s the Create can create a competitive disadvantage if your product gets priced a little higher, because someone else doesn’t have to collect it. But in theory, they should. If the state requires it, every seller has to do it, there’s no option Amazon’s going to going to pay and it doesn’t matter whether you personally have Nexus or not.
early on when I first started my business and I got to about six months, you know, I had hired a local accountant and went to them for taxes. And I got, you know, super deep in the hole because that accountant didn’t understand e commerce. So and for the listeners listening, you know, I would just say that early on, you know, try to reach out to I’ve been working with Josh and his team Ron and and Chad over there for almost two years now, and these guys know exactly what they’re doing in terms of e commerce and online sales where as a kind of a local accountant, that’s not to knock a local account, you know, a brick and mortar accounting but but reach out to a specialist and and because, you know, taxes are complicated, right like I I solve problems and other areas tax is not one of them. So it was overwhelming for me. So but when I reached out and found Josh and his team, it was, you know, it was very reassuring these guys jumped in and said, Hey, boom, boom, boom, do this. And it was like a ton of weight lifted off, you know, so I would just say that if you’re listening, you know if this if this topic is super overwhelming, like it is for me, I’m not an accountant, right. So but but there’s specialists out there that can help. So don’t let it overwhelm you just reach out, find out find someone that specializes in this.
You’re good to go. I can just add to that it was it was 3am on July 15. The day that all the returns needed to be postmarked in our I was wrapping up my tax return and I am a CPA, but I don’t I’m not super fluent in tax. And Josh, I think, in the next year, I’m going to get a hold of you and we’d like to start working with you as well. That was sitting there at 3am just making sure everything taking tide out I I realized that this is something I need to get off of my plate. And I’m probably not doing a great job at it to start with.
No, it’s tough. And I think that’s exactly right. What you said Ken is get someone that specializes in your industry. If you’re a real estate investor, get someone that works that works with a lot of real estate investors through e commerce, get someone that works with a lot of e commerce and on top of their specialty. Like we know that our specialty is income taxes, our specialty is not sales taxes. So when you have specific questions on sales tax, we’re going to say alright, let’s consult pies or let’s consult tax jar. Let’s consult with people that this is all they do. Because is that important in that difficult? So the more specialists you can get in your corner I think the better.
So Josh when somebody first starts anytime business, oftentimes they are bootstrapping their earnings and reinvesting everything back into inventory. And they may not take a salary for, you know, the first year, the first two years. And at some point they need to transition into drawing a salary. And I know that and I can just speak to a situation of my own where there’s a lot of volatility in the market, and I don’t know how I’m going to finish out the year. And for a particular brand, say I would like to extract $100,000 out of that business for a salary, but I’m not sure if that’s going to happen, and I’m not sure if the earnings will be there. Is there in terms of just tax efficiency? Would there be any gains or disadvantages to say, putting yourself on salary for 50,000 and then at the end of the year bonusing, out at 50,000 as it can be pears to, you know, say just $100,000 salary. Sure.
So yeah, someone so depending on what type of entity you are, so if you’re a sole proprietor or just an LLC, you actually can’t pay yourself a salary, you just take what they called distributions. And that you can take as much or as little as you want. There’s there’s zero tax impact whatsoever. So if you’re a sole proprietor, you’re an LLC, you’re a general partnership. This isn’t something you have to worry about. You just have to you take out money when you want it and don’t take money out when you don’t want it. Once you become an S corp, not only can you take a salary, you have to take a salary, and it has to be what they call a what the IRS says a reasonable salary. And the IRS being the IRS, it’s pretty big, what they what a reasonable salary is, right? There’s not a specific X percent of this. So some of it’s common sense. If you’re making $500,000 a year you can’t pay yourself $5,000 and called a reasonable salary. What we’d like to tell people is you have to pay yourself what it would cost to replace you in your role in the business, right. So kind of think about what you’re doing day to day, how many hours you’re working per week. If you said I want to keep my business, but I don’t want to do this work anymore, I’m gonna hire someone to replace me. Generally, what would you have to pay someone to have that role? That’s what you have to pay yourself. If you want to pay yourself more you can, it’s just the higher the salary, the more taxes you pay. So once you establish what’s reasonable, how you pay that out, makes no difference. So let’s say you go to your example you say that all right, 100,000 is reasonable hundred thousand is what I want to pay myself. You could do $50,000, like you said, and and then just get to the end of the year and do a bonus for $50,000. There’s no tax impact of that. But people say that bonuses are tax higher. That’s that’s not the case bonuses. If you work at a job, they’ll withhold higher on a bonus, because they’ll assume it puts you into higher tax brackets, but you don’t actually pay higher taxes on that. If you overpaid, just get it back in the year. So what I’m saying is makes no difference you can pay 50,000 now 50,000 in December as a bonus, we have some clients who literally pay themselves, no salary get to this December and say, Alright, I need to run this salary, and it runs all $100,000 at the end of the year, whether it’s actually paying themselves $100,000 or simply saying, I’m gonna run it through payroll and pay the payroll taxes on $100,000. But I didn’t actually pay myself $100,000 salary, which that’s a little more advanced strategy. You can request distributions and things like that. But what I’m saying is there’s there’s tons of options, and there’s no impact for how you do it.
Very nice. So if I’m understanding you correctly, you don’t necessarily have to take a paycheck every two weeks, which can be a consistent cash flow suck on your business, you can kind of time it to where it may make sense for from a cash flow standpoint, as long as you know, from the IRS standpoint, they’re just looking at how much was taken out in salary throughout the year.
Is that right? Exactly. They want to
know they want to make sure you pay yourself a reasonable salary for the course of a year and they most importantly want to make sure you pay the payroll taxes on that power when you pay that really makes no difference.
One last question that I have for you and this has been a topic that’s come up in a couple of masterminds that I’ve been in. And that is building a warehouse. And I know that that’s something that as people grow and have more inventory, that may be something that’s a good fit for their business. Now, when I think about this, this plan, there would be two ways to go about it. One is, it could be a business expense, and it could be a capital asset on on your business’s balance sheet. On the flip side, you could set up a separate real estate entity and charge yourself, you know, fair market rent. Have you seen, you know, what are your clients doing? When in this situation? Is there a more tax advantageous strategy to build up, you know, a big project like this?
Yeah. So, there’s a few options there. I think that mostly it’s gonna come down to a legal question, your attorney is probably going to tell you to keep the warehouse in a separate entity. Just so if something happens to the warehouse that can’t come after your business for it. From a tax perspective is not going to make much difference because they have something that’s called the self rental rules. Meaning you can’t make or lose money when you’re renting to yourself. So you can chart charge yourself fair market rent, like you said. But if you show a loss, are there certain rules in place that it’s not gonna, basically you’re gonna, you’re gonna pay yourself rent on one side, and you’re going to deduct rent on the other side, so it’s gonna be a wash, right? You’re gonna pay yourself $500 rent over here, claim that $500 of income and deduct $500 on the other one, the net result is a wash. Okay, so tax wise, it doesn’t matter too much. Whether you keep it in one business or form it in a separate entity, you’re going to get the same deductions either way. Where the difference is going to come it’s going to be legally.
One last question. Sorry, Josh. You are a wealth of information. This is awesome. One One thing that I know a lot of our listeners run into is saying their first year of business, they don’t make any money. They may be reporting a loss and I’ve heard people say Well, I didn’t make any money this year, I’m not going to file a tax return. What would you say to that individual,
I would say, file a tax return for your own benefit. Because let’s say you have a W2 job right? You make $100,000 a year and that w two job, and it’s your first year in business and you lost $10,000 those can offset each other. So your hundred thousand dollars from your job now becomes $90,000 of taxable income after you deduct that $10,000 loss. So you’re paying less taxes you’re saving money on your overall tax return by filing that those business taxes
Awesome. Awesome. No, that’s that’s a message that I think a lot of people need to hear. And, and I’ve heard that I can’t tell you the number of times I’ve heard that is people say I didn’t make any money, or I didn’t make that much money and so I’m not going to file a tax return. And it always seems like that’s not the best option but I wanted to check in with an expert and see if that was in fact not the best option. So can you want to get started with the fire round?
Yeah. So Joshua on at the end of every show, we take everybody through a lightning round. We got three quick questions. What is your favorite book?
Yeah, this is a tough one for me because it’s hard to narrow it down. I’m gonna go with the wealthy gardener by Johnson fork. Tons of entrepreneurial lessons building. Well, just anything you can think of is in that book. And it’s easy read. It’s entertaining. You know?
Yeah, I’m halfway through that book right now. And I enjoyed it. It doesn’t bog me down. It’s great book. What are some of your hobbies outside of work?
Ah, my biggest one probably. I’m the girls high school tennis coach in the fall. So we’re getting gearing up for that right now. I got I have three kids and one foster baby in the house at the moment. So we’re plenty busy with those if you call that a hobby. Yeah, sports family. That kind of stuff.
Nice. Yeah, I would definitely say you know, three, four K. That’s a hobby for sure. Excellent. Okay, last one. What do you think sets apart successful ecommerce entrepreneurs from those who give up fail or never get started?
Yeah, I touched on this earlier. But the biggest thing for me is perseverance. It if you’re going to get into any type of entrepreneurialship role, you got to know that you’re someone that that can stick through obstacles can can look at a problem and, and just, there’s a way to solve every problem. If you’re someone who just looks at a problem and says, there’s nothing I can do. entrepreneurships probably not going to be for you. You need to look at it and say, Man, the SEC sales tech stuff is really difficult. I don’t even know where to start, but I can go ask this person, right? There’s a lot of people are gonna be overwhelmed just thinking about sale sex, just hearing our conversation here. You need to be someone that says I need to take action somehow, whether it’s just asking someone whether it’s getting started myself and learning and making mistakes. I just got to find a way.
Excellent, excellent advice. So Josh, really appreciate you coming on the show. Sharing all your knowledge on taxes and Accounting. How can people get ahold of you?
Yeah, so they can always go to our website we have a lot of free information on there they can tap into www.cpaonfire.com or they can reach out to me directly firstname.lastname@example.org
Awesome, very nice. Well Josh, we really appreciate you being a guest on the firing the man podcast. Thanks for joining us.
Hey, thanks for having me. It was fun.
Thank you everyone for tuning in to today’s www.Firing The Man.com podcast. If you like this episode, head on over to www.Firing The Man.com And check out our resource library for exclusive firing demand discounts on popular e commerce subscription services. That is www.Firing The Man.com/resource. You can also find a comprehensive library of over 50 books that Ken and I have read in the last few years that have made a meaningful impact on our business or that head on over to www.Firing The Man.com/library. Lastly, check us out on social media at www.Firing The Man.com you know, on YouTube at www.Firing The Man.com for exclusive content. This is David Schomer and Ken Wilson, we’re out!
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