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On today’s episode; Steve sits down with Roger Knecht, President of Universal Accounting Center to discuss the ways in which both firms’ distinction between tax planning and tax preparation helps their clients stay ahead of the game with proven strategies for your business!
Episode Transcript
Intro:
You’re listening to the Practical Tax podcast with tax attorney Steve Moskowitz. The Practical Tax podcast is brought to you by Moskowitz LLP, a tax law firm.
Steve Moskowitz:
Welcome to everyone. And we’re looking forward to another podcast, and we’re looking forward to tell you all the benefits you can have for your tax return. And it’s a shame, ’cause most people, they think about their tax return, and they think about, well, that’s some guy movin’ the numbers from one place to another. And you know what? We’re already laughin’, there’s so much more to it. And in addition to savin’ you taxes, this also helps you to run your business. So, what I’d like to do is go ahead ask our guest to introduce himself and tell us all about you.
Roger Knecht:
Happy to. First of all, Steve, thank you for having me on the webinar or podcast here. The idea is, I’m Roger Knecht, President of Universal Accounting Center, and I’ve worked with accounting professionals for more than 20 years now, helping them run and operate their businesses. And the advice, the suggestions that I hope to offer today are meant to help you build a better relationship with the accounting and tax professionals that you’re interacting with, as you run your businesses and live your lives.
Steve Moskowitz:
Excellent. And what we’re gonna do is go ahead and say, so somebody knocks on your door and says, “Hi, how can you save me money? “What’s the secret, what do the big boys do?” What would you tell ’em?
Roger Knecht:
Well, the big boys have a variety of strategies that some of us lessers don’t necessarily have access to, but I can give you the distinction that I think we should start with, in that there’s a difference between tax planning and tax preparation. I think one of the first errors that we need to recognize is, whether we’re individually or as a business, looking at the taxes, we need to realize that December 31st for most things is kind of a drop dead date, and too often what happens, whether either individually or with our companies, we fail to realize that tax season isn’t April 15th or maybe some other tax deadline. It literally is the end of the calendar or fiscal year, and so anything we can do with the tax preparer before those deadlines to mitigate our tax liabilities is very prudent. It’s smart, it’s important. Sit down with someone and actually kind of come up with a strategy, a plan of how you’re going to mitigate your tax liabilities.
Steve Moskowitz:
And that’s so true, and that’s so important. And that 12/31 deadline, I call it 12/31 Year One, is so important, and so many things do have to be done by 12/31 Year One, however, there’s some exceptions. A lot of the pension plans allow you to go ahead and create them and fund them up to the time of filing the return plus extension, so that’s something you can do in Year Two that will save you taxes in Year One. And another thing is amended tax returns. A lot of times clients will come into our office, and I’m sure the same with yours, and you say, “Well, you can do this and this and this.” And they invariably say, “Oh, is that new this year?” And I say, “No, it’s been around for years.” And they say, “Well, how come my last person didn’t do that?” And we say, “Well, that’s why you’re here.” And then, we can go back and amend the federal return for the last three years. So sometimes, it’s not only about saving money for the current year, but going back three years on the federal return. And if you’re in a state that has a state income tax, amending that one as well, and there’s different statute of limitations for those states. So Roger, tell me some other things, when somebody walks in the door and says, “Well, what should I bring with me?” What do you tell ’em?
Roger Knecht:
Oh, good question. Well, first of all, they’re expecting a variety of forms from you, and so anything that you have that reflects say any investments that you currently have access to, any income streams that you’re obviously using, whether it be a W2, a 1099, K1. Those types of things are ones that you need to be bringing to the meeting because they’re going to use those to file, and from a business point of view, it’s very similar. You’re bringing in your P and L, your balance sheet. Those types of things are what are necessary for the filing. But just to back up a little bit, I do wanna stress that your first meeting with the tax preparer should not be at tax time when they’re filing. These meetings should be taking place earlier. And you were correct to say that there are exceptions to that 12/31 deadline, and that’s to simply say that, even though you can invest and maybe fund some pensions and so forth, even though that funding can occur prior to the filing, the plan should have been discussed before that year end, that that was the intent or goal should the funds appear. So it shouldn’t be kind of a last minute hustle of we’re trying to generate the money and find the cash to make those fundings. We should have actually been strategic about all of this and beforehand had those conversations, and so it’s really stressing the point that there’s a distinction between tax planning and the preparation and filing of the return.
Steve Moskowitz:
Roger, that is so correct, and one of the things that I always say to clients in our practice is most people think, oh, well that that’s something I have to do in April or March. In fact, tax planning is something you should do all year round, and the tax return itself should be the mere summarization of the year’s work. And you even take a look at Tim Cook, the head of Apple, and he’s talking about how much time he spends with the company’s tax planning, and they’re an example that I use for people, because new client comes in and I say, “Hi, so you make more or less than Apple Computer?” They laugh, “Ha, ha, ha, “of course, I make less than Apple Computer.” And I said, “But guess what? “You pay more taxes than they do.” That’s why the tax planning is so very important. And Roger, what do you do if somebody comes in and says, “Hi, you know, I haven’t filed my returns for years, “and I don’t have any records.” Now, what do you do?
Roger Knecht:
Well, it does differ. You know, it is a case by case thing, but it is not unheard of. Typically what happens is, some people for various reasons avoid paying taxes, and we won’t get into the justifications or rationalizations as to why they don’t, but I will say that, whether they’re trying to buy a home, a car, some type of thing, they’re actually needing those tax returns. And so there is that motivation, all of a sudden, to say, “Oh, darn it, “I need to actually now get this taken care of.” And they walk in, and they’ve got say, two, three, four, whatever years of filings that need to take place, and that’s where it really gets interesting, because now we’re looking at penalties. We’re trying to figure out, okay, what strategy do we wanna take, even as we’re now dealing with back taxes. So there are things that we need to be aware of, so it does happen. Unfortunately, it is something that we have to deal with, but it is something that can be resolved.
Steve Moskowitz:
And we resolve that for people all the time, and there’s all kinds of ways to do this. And another thing is, when people think about their accounting records, a lot of business people think, oh, that’s such a pain. I got so much work to do on my taxes. And what I’d like to tell ’em. I said, “Well, wait a minute, I don’t.” And as you know, before I was a tax attorney, I was a CPA. The accounting records are not just to do your tax return. It’s to help you run your business. You wouldn’t dream of driving your car with your eyes closed, then why.
Roger Knecht
No, I think, that’s, yeah, that’s a very important point. Some people actually do think the reason for accounting is to determine your tax liability, meaning they equate taxes and accounting as being one and the same, and that’s actually not true. You shouldn’t be just looking at your accounting information when you’re filing the tax return, looking at the yearend numbers. For the business owner, they should be using this information while they’re going through the year, looking at months and quarters, seeing what trends exist, making informed decisions based on the data that the accounting’s providing. And so, a true business owner, that’s interested in being successful and profitable, will utilize the accounting information. Now I do realize that most accounting professionals speak a foreign language to the business owner. They’re very good at what they do, but perhaps don’t speak that language of accounting, and that’s totally fine, but you need to be working with someone that, as an accountant, can act as that translator to help kind of isolate and identify the trends and things that the business owner needs to be aware of and noticing. Great example is just cash flow. I mean, a business owner could be really excited about the sales going on in the business and realize that they’re busy, but cash flow wise, there could be a problem with supply and materials and vendor relationships and payroll. And so, business is good and busy, we just don’t have the cash flow to run the company, and we wanna avoid those challenges, and that communication between the business owner and the accountant is what’s gonna facilitate that.
Steve Moskowitz:
And that’s so true too. And you know, to us, they’re in taxes. The characterization is so meaningful, but most business owners look at their checkbook. How could I have a profit, I don’t have any money in the bank?
Roger Knecht:
That’s right.
Steve Moskowitz:
And then, you wanna explain to us the difference between an expense and a capital item or inventory, ’cause the taxpayer writes a check just the same for either one.
Roger Knecht:
Well, let me try and answer your question this way. What we need to distinguish is between accrual and cash accounting. Oftentimes, that’s where the distinction happens, because if a business owner is running on an accrual basis, the accountant is gonna try and draw attention to the fact that you are being profitable and are being successful. And on the balance sheet, you have inventory, and you’ve got receivables, and these are assets. And all of a sudden, the business owner is kind of, maybe pounding their chest, sayin’, “I’m being successful, and I like what I’m doing,” but on a cash basis, they’re realizing the receivables, that’s not money in the bank, the inventory, that’s not cash. I have to sell that to generate the cash. And so, the liabilities that I’m incurring, whether it be taxes or payroll or whatever the case may be, there’s value and worth in something, and then there’s something that’s intangible, tangible, but more importantly, there’s cash.
And so, what we’ve gotta recognize is business owners, they’re dealing with a lot of moving parts, and when it comes to taxes. Just case in point, you can pay taxes on your receivables, because it is reported as revenue, but in reality, until you’ve collected it, you don’t have the cash to perhaps pay those taxes. And that’s a common example of, you’re showing on your P and L that you’ve got the revenue, and you’re making money, and you’re reporting to the government that you made so much in profit this year. And they’re saying, “Great pay us our dues, “Uncle Sam wants his fair share.” But at the end of the day, if it was done on a accrual basis, you were profitable, but there wasn’t money in the bank. It’s not that that net income is showing up on the bank statement.
Steve Moskowitz:
And for our audience, let me define the difference between the cash basis of accounting and the accrual basis of accounting. Most small and medium sized businesses use the cash basis of accounting. That means you record income when you receive the money, and you deduct an expense when you write the check. Accrual, that’s more for the bigger companies and certain other companies, and with changes in rules now, you don’t have to really worry about it so much unless you’re making more than 25,000,000 in a year. And, chances are, if you’re listening to this podcast, if you’re makin’ more than 25,000,000 a year, you probably have somebody like Roger or our firm. And if you’re a smaller business, you probably, in most cases, want the cash method, because the accrual method of accounting is a theoretical concept that deals with when you theoretically earn something or incurred an expense.
Well, you know what? You can’t buy anything with theory. Most, and people get confused, and they say, “What do you mean I owe all these taxes? “I don’t have any money.” So at the beginning of your business, if you are making a decision, almost everybody goes with the cash method of accounting, and that’s why it’s so important to talk to somebody before you do anything. It’s just like seein’ a medical doctor. You wanna see him or her before you run the race to check your heart, rather than afterwards, when you’re laying on the ground with that pain in your chest saying, “Oh, well, maybe I should have seen the doc first.” And there’s just so many traps for the unwary that you can avoid, if you, you know, talk with somebody like Roger or us or anybody that’s knowledgeable in this area. That’s why you need the advice, and again, the accounting, don’t just think of it as, ah, it’s something I gotta do to file my tax return, or the government will do something bad to me. No, it’s something to help you. And what’s gonna happen is, I think when most people understand that these accounting systems are useful in making them more profit, they’ll be all into it. Roger, tell us how an accounting system can make a business person more profit.
Roger Knecht:
Well, I’m gonna give you an analogy. It’s the relationship that the business owner has with the numbers, and you’ve got basically three scenarios that you can experience as a business owner. One is you’re working with a coach, someone that’s like a trainer, that’s helping you excel in your skill and helping you be the best that you can be and be competitive. Or you’re working with a doctor, who’s trying to assess problems in the business, in your health, and trying to address things that aren’t healthy, such as maybe the blood or the cholesterol level, or maybe it’s an injury that you have. And then, you’ve got your coroner. The coroner is dealing with a deceased business, a business that’s gone bankrupt, that’s closed because it couldn’t keep everything straight, and it died on the table. So what we wanna do is say, what kind of relationship?
Steve Moskowitz:
But I’m alive.
Roger Knecht:
Well, they’re dead now, but the point is, is with the…
Steve Moskowitz:
That’s whole idea. You wanna deal with him before he’s a slab on the table.
Roger Knecht:
That’s right. So as a business owner, I ask the question, which do you want to work with, as you’re running your business? Do you wanna work with an accountant that’s a strategic advisor, that’s helping you make basically, informed business decisions and navigate some of the decisions you’re making, so that you’re making timely decisions? Or are you wanting to work with an account and maybe a CPA once a year, someone that you just kinda check in with, and they just maybe do an assessment once a year on your health? Or is it that one that you don’t ever see, or talk to, ask questions of, because you’re deceased, and you’re working with the corner? There’s three relationships that you can have with an accounting professional.
I encourage you, have a relationship with your accountant and tax person that is more frequent, that with the accounting professional is monthly, no less than quarterly. With a tax person, it should be three times a year. You meet with them to do the tax returns. I strongly urge you to meet with them following the tax season to say, “Okay, taxes are done. “We filed, what did we learn? “What did we miss out on? “What should we be doing this year differently “than we did last year, “because we missed out on some tax savings opportunities?” And then the third meeting is right before the end of the year. There are things that you should have done, that you learned in that second meeting, that you probably failed to implement, and here’s your last chance to make sure you get them done before the year end. And what I would propose is in that third meeting that you also identify, were there other tax opportunities, that either Congress recently passed that are new for the tax year that we can take advantage of that we didn’t know initially, or did my situation personally change, or the business, before the year end from when we last met, that we should be discussing changes in strategies as well?
So there’s three distinct meetings that can be happening with the tax preparer. So you’ve got your monthly or quarterly meeting with the accountant. You’ve got your three meetings with your tax professional. You do those, you are going to be proactive and confident that you’re limiting your tax liability with good confidence.
Steve Moskowitz:
And that’s what it’s all about. And, for example, with our clients, what we tell ’em, is we recommend they meet with us on a monthly basis, ’cause we do both for ’em. We do their taxes, we do their accounting.
And, going back to your analogy of that body laying on the slab, the whole reason you see the doctor regularly is, if you do have a medical problem, the doctor can treat it while it’s small, because the longer you let it go and you ignore it, the worse it gets, and the more the doctor has to do to save your life. And, then you get to the point where somebody just dies that could have avoided it. And that’s true with businesses, and what I’ve seen in practice a lot of times with small businesses, they’re so stressed, and they’re so strapped for cash that they cut corners. And that’s not going to the doctor, and then, they only go when it’s too late. And the person that’s doin’ your taxes can save you so much, not only in taxes, but helping you run the business and have it more profitable, and that’s what a lot of people miss. They think of, you know, a professional as just, aw, that’s the person that’s gonna do this stuff that the government makes me do. All right, you know, I’ll do it ’cause I’m forced to, but let’s minimize this. No, that’s the person that can make you more money and show you how to operate more efficiently and measure things.
For example, one of the things we’ll do, if a business person’s making good profit, and he or she sells 10 different items, whether it’s goods or says, “Oh, I’m doing a good job.” Well, the accountant comes in and says, “Well, let’s do the cost accounting here,” and say, “You know what, “you know, those 10 lines you’re selling? “You know, three of ’em you’re losin’ money on?” Now, you put ’em all together, you don’t realize, you say, “I’m makin’ a profit.” You could actually eliminate three lines, and you can make more money, and you’re actually working less to make the more money. Or you can become more efficient, or you can adjust prices. Or you can also use it as a measuring stick. For example, if you have 10 sales people, and eight of ’em are producing about 100,000 a month, and two of’ em are producing about 20,000 a month. You say, “Well, wait a minute. “What’s, this has nothing to do with taxes?” This is running your business and being profitable. Well, wait a minute. Why are those two people makin’ so much less than the other eight? Maybe it’s because you assigned them to a territory where they didn’t belong. Maybe you’re a ski shop, and you assigned them to the Hawaii division. Well, you’re not gonna sell many skis in Hawaii. Or maybe they need more training, or maybe they’re not doin’ the job, or maybe they’re not cut out for sales. But the bottom line is, this gives you an opportunity to fix something before it’s a problem, just like a physician. If you do have a problem, most problems are not fatal. You can fix it before it gets worse and worse, and eventually, it becomes fatal, and that’s what accounting can do for you. And with us, we go ahead, and we do the tax accounting for you, the tax returns. And that’s why I became a tax attorney, to go ahead and do a lot more than just the perception of moving the numbers from one place to another, help people run their businesses.
And I always look at the Fortune 500 and say, “You know what, “the laws are not just made for them, “they’re for everybody.” But most people just are so busy running their business, their biggest decision is, well, do I get some sleep, or I have something to eat tonight? Whereas, the big companies have a lot of people, like Roger and us and all army of other people to say, “Do this, do this, do this, do this.” The bottom line is, through this accounting that we’re doing and services we offer, we can actually provide this to a lot of small businesses that can’t afford to have a fulltime person doing it for ’em. They don’t need it, because this’ll do the job for ’em. Roger, do you have any parting thoughts or things you wanna tell us?
Roger Knecht:
I do, my parting thought would be this:
Accounting is an essential, it’s not a liability. It’s not a, “I-have-to-do-because-the-government-requires-me”. It is something that, if you are interested in success, you will deliberately put interest in the numbers, personally and professionally, as you run your business. And then, the second thing I would add is, when you consider that a business is a selfsustaining living, breathing entity, and it’s something that, as owners and presidents of companies, we have a stewardship over, I think you start to make a little bit better decisions, realizing that, all of a sudden, this is an entity for which you’re a guardian of, and you’re taking care of it. And so with that perspective, maybe you’ll have a few little insights on what it is you ought to be considering, as you’re running or managing a business. And then, the other thing is, is definitely thank you for having me here. I appreciated the conversation. It was a good dialogue.
Thanks so much for joining us, and to all the listeners, we look forward to having you come back and visit us often. Thanks so much.
Outro:
You’ve been listening to the Practical Tax Podcast, with tax attorney, Steve Moskowitz. To hear more podcasts, go to Moskowitzllp.com/practicaltax. The information contained in this podcast is based on information available as obtained at the date of it’s release. MoskowitzLLP and it’s affiliates are under no obligation to update this information as changes occur. Applying this information to your specific situation requires careful consideration of all factors, which may be applicable, and any information is not to be considered tax advice or legal advice. Further, this is attorney advertising and the facts and circumstances displayed in this case are dependent entirely on the facts of that particular case. Please consult your tax advisor before acting on any matters discussed.
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