This time of year our thoughts turn to turkey and taxes! Yes, taxes! I know very few of us are fans, but tax strategy is important business strategy, and not knowing what you need to know can cause you to leave money on the table or worse.
Today, I’m going to share with you seven tips about taxes based on my own experience:
- How to choose the most advantageous entity type for tax purposes
- Want to hang onto more of your money on tax day? Make sure this person is a member of your financial team (hint: it’s not your accountant)
- How this one decision might save you thousands of dollars
- The number one action you need to take every year—no matter what
- And much much more.
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Davina Frederick: Hello and welcome to the Wealthy Woman Lawyer podcast. We believe all women lawyers deserve to be wealthy women lawyers. Our mission is to provide thought provoking, powerful and practical information to help you in creating your own sustainable wealth generating law firm without overwork or overwhelm so you can live your best life. I’m your host, Davina Frederick, let’s get started.
Hi, everyone, it’s Davina Frederick, of Wealthy Woman Lawyer. We help women law firm owners scale their law firm business to and through a million dollars in gross annual revenue with total ease. I’m sure taxes are on your mind this time of year, I know they certainly are on my mind. And if they’re not on your mind, they should be. Why? Because tax strategy is one of the most important aspects if you want to scale your wealth generating law firm business. And now is the time before the end of the 2021 calendar year to think about what last minute moves you can make that might decrease your tax liability. If you do not have a good tax strategy, you surely will be leaving a lot of money on the table. Worse though, is you may quickly find yourself and your law firm business in hot water unless you understand what you need to do about taxes.
So I’m not going to get into specific tax advice today. I encourage you to discuss that with the professionals you hire to help you with it. But I am going to share with you some advice around taxes based on conversations I’ve had with many business owners over the years. And my own experience as someone who has owned and invested numerous businesses myself. These are things that I wish I had known, I wish someone had told me and I kind of had to learn the hard way. So tax tip number one is make sure you have the right entity designation for your business. And that you understand a business entity is not the same as a tax designation.
Now, this is something I’ve seen come up over and over again, in a lot of social media conversations around business entities. And it’s very clear that for those of you who did not go on to practice business law, you may have some confusion around this. So I just want to clear this up for you. So for example, did you know a limited liability company is not a corporation. We often see this where people say I have a limited liability company and then they refer to it as a corporation. A limited liability company is not a corporation. However, you may have a limited liability company and be designated as a an S corp. So this is where I think that confusion comes in. Limited liability company is a type of business entity just like a C Corp, just like a partnership, just like calling something a professional association, which a lot of attorneys do, or partnership, those are different types of entities.
An S Corp is an IRS designation for tax purposes. So you can have an LLC, and then you may file a form with the IRS and says I for purposes of tax filing, I would like to be known as an S corp. So you want to make sure that you understand not only your entity type, but what that means for you and your personal and your business taxes. Okay? So get really clear on what the pros and cons and the benefits and the liabilities of certain types of business entities with regard to your taxes. This is something you may want to discuss with your small business attorney, your tax attorney, or even your certified public accountant. Okay. So make sure you really get get that straight in your head because it can cost you a lot of money if and you can have things set up the wrong way if you don’t do this. So follow the advice that you give your clients in your law practice and get that professional advice and make sure you clearly understand what it is that you’re choosing.
Okay, number two, tax tip number two is hire an accountant preferably a certified public accountant with tax planning experience. And it’s not enough just to hire an accountant. You want to hire one who, who will take the time to do tax planning with you and really understands what tax planning is, or hire a tax attorney with tax planning experience who will help you make sure that you are creating the right strategies for your business entity, for your lifestyle and the way you want to grow your business, okay? The wealthier you become, the more important tax strategies you will need to employ if you don’t want to turn over all your profits to the IRS.
So it’s gonna be really important, the more money you make that you have the right tax strategies to deploy, okay. So you want to discuss this the particulars of your circumstances, I could give you a lot of different tax strategies that I have used that are good tax strategies. But the reason why I’m not going to do it is because I think that it’s just like with any other law firm advice, it depends, it depends on your situation. And so we don’t want to use a forum like this, to give specific tax planning advice, when you really need to be discussing that either with your experienced tax planner, CPA or attorney, okay.
Number three, is proactively make an appointment with your accountant or your tax attorney, or both, at least a couple times a year to discuss tax strategies for your business. It may cost you a few bucks for that appointment, just like it may cost a few pucks for your clients to make an appointment with you. But the money it will save you in taxes and the headaches it could save you in taxes and dealing with the IRS are well well, well worth that minute investment. So I learned the lesson the hard way. I didn’t do this because I was trying to save money. I just didn’t know that I should be scheduling an appointment with my CPA at other times of the year besides when I filed my taxes. When I first started out, I just thought well, I’ll meet with him when it’s time to file taxes. And now it’s going to be good enough.
But what I found out was that although my tax accountant has been a an accountant, certified public accounting for many, many years, he, and he’s super, super smart, he would not proactively tell me anything. So his favorite refrain, when it was time to file my taxes was well, you should have done X, whatever X was. Of course, by then it was too late for me to do anything. Because the opportunity had already passed for me to deploy some of the tax strategies that he mentioned to me. And because I hadn’t met with him throughout the year for him to have a clearer understanding of my financial picture and how much money I was making to get that year and the way I was paying myself and all of those things. He didn’t think to advise me until it was too late for me to do anything.
So I could have gotten upset with him and blamed him. And you know, I wasn’t too pleased, I’ll tell you that. But I took responsibility for my own business and my own actions. And I begin making proactive planning appointments with him throughout the year. So usually we meet about six months into the calendar year, and then we meet again, in November. So my books follow calendar year. And those are good points for me to meet with him. Because about six months into it, I have a good idea of what I’m on track for and we could start doing some sort of big picture planning. And then we meet again in November or early December.
So we can make any last minute sort of moves if I need to make some moves, to shift some things around so that I am not overpaying in taxes. And I’m keeping that money in assets are in my pocket, right? So very, very important for you to be proactive in this. It is not your CPA or your tax attorney’s responsibility to make sure those appointments get set. It is your responsibility to make sure that you are taking advantage of their expertise and knowledge to help you and don’t wait till the last minute because they get really busy during those times of year. So be proactive.
Okay, number four, do your own research as well on taxes. It’s really going to help you be a better consumer. I know how many attorneys get irritated with clients who say, well, you know, I looked this up on the internet or I looked that up on the internet. But I’m here to really shift your perspective on that limiting belief. I think it is, first of all, you’re not going to change people’s behavior just because you bitch about it. And secondly, I think it really makes us better consumers to go out and research and try to learn more about what it is that we’re trying to accomplish. And then to take that information to our professionals and ask some really intelligent questions based on what we’ve learned.
Not everything you’ve researched and learn about from you know, doing your online research is going to apply to your particular situation. Just the same thing with your clients when you see them going out. And they’re researching and then they come to your office and talk to you about a family law matter. They don’t realize that something that they found out doesn’t apply to their particular situation, it’s your job then as the professional, to explain to them why it doesn’t and what you should be doing instead. It’s the same thing with you, though. If you want to be a better consumer, you want to be a better citizen, you want to be a better business owner and a wealthier business owner then it’s incumbent upon you to learn about taxes. I learned from reading books, written by tax professionals, I learned from listening to podcasts on the subject from that tax professionals put out and I learned by speaking with other experts, okay.
So there’s a lot of information that I learned. And then I go back to my accountant, my tax attorney and my financial advisor. And I say, okay, well, what about this thing that I found out about? Does this make sense for me? I think it does. But is there anything that I am not, that I’m not seeing that you can tell me, right? So take it upon yourself, this is your business, this is your life. You’re the one who wants to create this wealth generating business, and you’re the one that wants to be prosperous and wealthy in your life. So don’t sit back and expect people to spoon feed you information. Go out there, be proactive, do some research and really pay attention to it. Because you might be surprised about a strategy that you could deploy that you have never even thought of before and that your CPA or your tax attorney hasn’t thought to share with you.
All right, number five, make sure when you’re talking with your financial advisor, they and you understand the tax implications of your money moves. A lot of our financial advisors may have become a financial advisor by taking a 30 day course, they may be representing a certain product. And they may not be as tax savvy, or tax savvy at all. And so we go into meeting them and thinking, well, this person is qualified to be a financial advisor, surely they know about taxes, and that is not always the case. So if you or your financial advisor do not understand the tax implications of any of your money moves, then some of those money moves might wind up costing you more in taxes, than you would stand to gain in dividends or interest or any other benefits, right. So don’t just assume your financial advisor knows the tax implications of all the financial choices you wish to make. Again, it’s very important, whatever the two of you decide before you make those moves, that you consult with your CPA or your tax attorney, and make sure that those are the best move for you in your business.
Alright, number six is to take your taxes seriously. File them every year, even if you don’t think you could pay. To take your taxes seriously file them every year, even if you don’t think you can pay. I am always kind of surprised when I speak with women law firm owners who haven’t filed their taxes for two or three years. We’ll start to work together. And I’ll begin to ask them financial information. And they’ll say well, I haven’t filed my taxes for the last couple of years. And most of the time when that is the case, it is because they know they’re going to owe taxes and they’re scared of it. Or they feel insecure around knowing their numbers and financial information. So they’re just kind of functioning like an ostrich by just putting their head in the sand about the whole thing.
But here is the deal. There are major tax consequences for not filing your taxes. Even if you don’t think you can pay the taxes that are owed, go ahead and file, talk to your CPA, get them done, file. You know how much you will owe then. And you could set up a payment arrangement with the IRS. It is fairly easy to do, it is not difficult. I know I had one year when I had a big surprise on my taxes when I did my taxes. This is when I wasn’t as proactive in planning. And I had to set up a payment arrangement with the IRS because I didn’t have that big chunk of money to fork out. And I wasn’t at the time making quarterly payments, so I wasn’t doing that proactively. So there were penalties and interest, and all those kinds of things.
Those things that you learn when you first start out in business that nobody teaches you. But the IRS is fairly easy to set up a payment with. I’ve never had an issue with it. And one of the things that is very serious is if you don’t file your taxes, and you don’t want that to be an issue for you and your business. If you want to borrow money to invest in your business, you want to get a credit line, any of those kinds of things, you know, they’re gonna they’re gonna want to know about things like this. Why haven’t you filed your taxes? So make sure that you stay on top of that.
And number seven, tip number seven is keep good records. I know your CPA will tell you this, I know your tax advisor will tell you this, but keep good records of what you’re doing in your business and make sure everything is categorized properly. One of the requirements I have of my bookkeeper is that we reconcile my books every month. So every month, my books are reconciled, everything is properly categorized, because I use that information throughout the year to help me make good decisions about my business. And I can predict where my profitability is going to land. And I may make choices to reduce the percentage of profitability in my business by making other money moves to keep my tax liability down. And other times I may decide that I want the higher profit numbers. So the best way for you to make good business decisions is to keep good records. So talk with your CPA about what records you need to be keeping, and get them to give you a checklist to help you.
Okay, so those are seven tips that I hope you will find very helpful as you get ready to wind up 2021. And make those money moves for your taxes. You know, if you do not know this, signing up for business coaching is a write off. Some of my clients actually will pay in full for the entire year if they’ve had a really great year in their business. And they know they’re going to continue coaching with me because they’ve had such a great year and they want to build on that. They may decide to go ahead and pay for private coaching in full before the end of the year, so that they can write that off on their taxes for the 2021 year. Same thing with those clients we do Google Pay Per Click ads and I have some clients who pay in full for the next year’s ad fees for the work that we do for them and some of their ad spend.
So I thank you for listening to the Wealthy Woman Lawyer podcast today. I hope you’ve enjoyed this episode. If so, please leave us a review. The more people who leave us five star reviews and ratings and reviews, the more eyeballs we get on this podcast or your ears we get on this podcast. And we really appreciate that. If you are a woman law firm owner looking for support as you transform your law practice into a million dollar wealth generating law firm business, please join us in the Wealthy Woman Lawyer League.
In the League, I not only teach you the exact framework I’ve used to teach hundreds of women law firm owner clients how to grow their own million dollar law firms, but my team and I provide you with weekly live support so you can get all your questions answered and begin creating your own fortune with total ease. So just visit www.wealthywomanlawyer.league to enroll now. www.wealthywomanleague wealthywomanlawyer.com/league to enroll now. We do have that link in the show notes so you can just click on it and go right from there and get all the information you need to know about the League. Thank you so much for listening, and I hope to see you soon.