Pay Less to the IRS: How to Reduce Your Small Business Taxes with Jayden Doye

Transcription:

Dayna Thomas, Esq.:
Hi everyone, I’m Dayna Thomas Esquire, and welcome to Launched & Legal, where it’s my mission to help you strategize, legalize, and monetize your business. I’m so excited that you’re watching because today, and in every show, I’ll be sharing the best practices, and tips to take your business and brand to the next level.

So, we see some of the nation’s most wealthy entrepreneurs boast about not paying any taxes. As small business owners, we’re wondering—how are they doing that legally? Well today, my guest is gonna shed some light on how we can pay less to the IRS.

Jayden Doye is the President of Prestige Accounting Solutions located right here in Atlanta. His company works with professional service providers to climb from six-figure revenues to six-figure profits. Today, Jayden will help reveal some of the ways that we can keep more of the money that we earn through our business, which is definitely a win for any entrepreneur. Jayden, thank you so much for being here.

Jayden Doye:
Thank you for having me.

Dayna Thomas, Esq.:
If I was your client and I said, “Hey Jayden, my law firm is doing fantastic, we’re making so much money, but I’m just paying so much in taxes,” what advice would you give me?

Jayden Doye:
Well, the first step is to make sure that you’re in the right entity. So, as a solo practitioner, you have the option to be taxed as a sole proprietorship, a s-corp or c-corp. And depending on your net income this year, and where we project your net income to be for the next five years that will determine what the best entity is for you.

Dayna Thomas, Esq.:
Got it.

Jayden Doye:
Then, I would look at your income and expenses on your profit and loss statement. So, a lot of times entrepreneurs are actually using personal funds for business expenses that can be tax deductions. And so, I would make sure that, wait a minute, we are missing some expenses. So, those are the first two things that I would do if you were my client.

Dayna Thomas, Esq.:
Absolutely. And something else that I want to bring to the attention of the viewers that you touched on, because keeping your liability protection strong, you have to make sure not to co-mingle your funds. So if you watch Launched & Legal, I’m sure you have heard me say that before. It’s so important not only for accounting purposes, but also for legal purposes. So, one of the most important things that you need to do for your business is protect your liability. And if you co-mingle your funds, meaning you use personal funds for business expenses, or you get paid for your business in your personal account, that’s called co-mingling funds. So, that helps to do what we don’t want to do, which is jeopardize our liability protection. So, thank you so much for pointing that out because that is something that is on the accounting and tax side, but it’s also on the legal side as well.
So, I know that you work a lot with service providers and professionals. So are there certain types of businesses, or business owners that have the ability to take more advantage of the tax strategies that you know of?

Jayden Doye:
Yes. For instance, restaurants, there’s a tip credit that restaurant owners should definitely be aware of. So, if you own a restaurant, ask your CPA if they’re knowledgeable about the tip credit. It’s very helpful for whether you are a 100% owner, or you have a partnership.
When it comes to technology, a lot of software development companies and technology firms, they take advantage of what’s called the R&D credit, which is short for research and development credit. And because they spend so much time in the research and development phase, and they’re creating these jobs the government pretty much rewards them for that. So, those are two that I would definitely say should be on the lookout for tax credits.

Dayna Thomas, Esq.:
That’s awesome because technology is huge nowadays. I know almost everyone has an idea for an app, or even how to utilize technology as an entrepreneur. So, I think that tip might even be able to help me with some ideas that I have. So, thank you for that.
So let’s talk about real estate. I think if someone was to Google or do a Google search for how to save on taxes, one of the first things that’s gonna pop up, whether that’s on YouTube, Google, or other search engines is something to do with real estate. Taking advantage of tax credits, or being able to lower your taxes as it relates to real estate. Do you know about that? Or can you shed some light on how that might work?

Jayden Doye:
Yes. So, it works for some, but not for all. So, I’ll say this, so depending on your income, in order to take advantage of losses that are related to rental home activity, you need to be considered a real estate professional. So, most people, when they talk about that they mean that they take a loss from some rental properties that they have. And they get a loss because it’s something called depreciation.
So, I’ll give some easy numbers so people could digest.

Dayna Thomas, Esq.:
Break it down for us, please Jayden.

Jayden Doye:
Okay so depreciation means every year you expense a piece of the property based off the basis. So, let’s just say hypothetically, the basis of a property was $275,000. Real estate property by default is depreciated over 27.5 years. Meaning every year you would have depreciation of about $10,000.

Dayna Thomas, Esq.:
Okay, got it.

Jayden Doye:
So if you have depreciation of 10,000, but you only have rental income of 8,000 now, you have a loss of 2,000. So on the surface, most people, when they talk about having losses from real estate that’s what they mean. However, if you make over a certain amount, then those losses actually are frozen, and they’re suspended, and they carry over year after year until you have some income to lower it.

Dayna Thomas, Esq.:
Wow. So, it sounds like it’s very specified.

Jayden Doye:
Yeah.

Dayna Thomas, Esq.:
It doesn’t work for everyone.

Jayden Doye:
No it doesn’t.

Dayna Thomas, Esq.:
And you need to talk to your CPA to see if it will work for you before you spend all this money on real estate thinking that it’s going to save you on taxes, is that right?

Jayden Doye:
Right.

Dayna Thomas, Esq.:
Okay, but there is a way.

Jayden Doye:
Yes, there are ways, yeah.

Dayna Thomas, Esq.:
Okay, absolutely.
So, one thing that I found out from researching about you is a new concept to me called profit first, right?

Jayden Doye:
Yes.

Dayna Thomas, Esq.:
I think you branded profit first. So what is profit first and how can that help us as entrepreneurs?

Jayden Doye:
So profit first is a cashflow method that guarantees the business to be profitable. It’s based on a book by Mike Michalowicz called Profit First, where in the book he describes how business owners should manage their funds. So, on this surface, you’ll have five accounts. You’ll have your income account, that’s where all of your earned income goes into. Then twice a month, on your allocation days, you empty out your income account, and you split that money between four accounts.
So I’ll just give you an example and-

Dayna Thomas, Esq.:
I love this, by the way, please break it down.

Jayden Doye:
Thank you.

Dayna Thomas, Esq.:
Go ahead.

Jayden Doye:
In this example we’ll say 5% of all your sales goes into your profit savings account. That profit savings account you’ll withdraw the funds from every quarter to treat yourself as a business owner to some type of vacation.

Dayna Thomas, Esq.:
You withdraw all of it or some of it.

Jayden Doye:
Some of it. It’s really up to the discretion of the business owner. Most people take out maybe half and leave some.
Then, you have your tax savings account. So you’ll put a certain percentage into your tax savings account. Depending on your tax planning strategy that you and your CPA work out that’ll determine how much should go into that tax account.

Dayna Thomas, Esq.:
Got it.

Jayden Doye:
Then, you’re going to put a portion into your owner’s pay account.

Dayna Thomas, Esq.:
It’s a third one?

Jayden Doye:
Yes.

Dayna Thomas, Esq.:
Okay.

Jayden Doye:
This is to pay you as the owner of the business. Too many small business owners are actually creating a job for themselves, and not paying themselves accurately. They’re overworked and underpaid.

Dayna Thomas, Esq.:
Absolutely.

Jayden Doye:
And by putting money from every sale into your owner’s pay account, you guarantee that you can pay yourself for your hard labor.

Dayna Thomas, Esq.:
That’s right.

Jayden Doye:
And last but not least whatever’s left over, so let’s just say hypothetically, we put 5% into your profit account, we put 10% into your tax account, and we put maybe 50% into your owner’s pay account. That’s gonna leave only 35% left over for you to put into your operating expense account. So, where most businesses are spending anywhere from 70 to 100% of income on operating expenses using profit first cuts down on that so that the business is more profitable.

Dayna Thomas, Esq.:
I love that. And the way you broke it down makes complete sense to me because a lot of times business owners they will pay… Or whatever profit is left over, after they’ve paid all their expenses. Maybe they have safer taxes. Maybe they have not. I think most don’t, but even when they put in all those categories they will use for themselves as profit whatever’s left over. So clearly profit first, as the name says, you make sure you get your profits first. And the last thing that you put into the account for is for operating expenses, which I think is such a new way to think about it because you can keep your operating expenses lower.
So, if all that’s left over is $2,000, then you need to make sure that your business can operate on $2,000. Not saying, “Hey, my business needs $5,000 to operate every month. And so, I’m only gonna pay myself X amount.” That’s such a new way to think about it. And I like it. And I think I’m gonna implement it. Thanks Jayden. We’ll talk some more.
So, pretty much entrepreneurs have an option to, during the tax year, pay quarterly estimated taxes of how much you think that you’re going to owe. Or you can just wait and in April, once you figure out how much your actual taxable income is, you can pay it all in April, is that right so far?

Jayden Doye:
Yes.

Dayna Thomas, Esq.:
Okay. Elaborate please and tell us which one you recommend.

Jayden Doye:
Okay so, I recommend making quarterly estimated tax payments. Because the IRS expects you as a tax payer to pay at least 90% of your tax liability within the tax year. So, if you wait until April to pay your tax liability, and let’s say your tax liability is $20,000, you will pay $20,000 plus possible penalties and interest. So, to avoid that, let’s just pay it throughout the year.
In addition to that it really slows up cash flow because now, you have to come up with this large lump sum to give the government and that will slow down your business operations. Versus if you were using profit first, you always have the money set aside. And when you file your taxes, you will get close to break even. And that’s the goal.

Dayna Thomas, Esq.:
That does make sense because I’ve done it both ways. So, I understand what you’re talking about. And for me, it has been easier, especially now as a more seasoned entrepreneur, to just pay your estimated taxes instead of a huge lump sum in April. So, thank you for shedding light on that.
Saving 40% of your income or revenue for taxes that is just not the thing to do. Can you elaborate on that? What your thoughts on that are?

Jayden Doye:
Yeah, there’s a lot of people out here that are giving tax advice. And I’m just like, “Wait a minute, where did you get that information from?” And when it comes to saying save 40% on taxes, for most small businesses, that is just way too much if we’re being 100% honest. And I say that because if you’re saving 40% on taxes and, let’s say, you’ve been saving all of that money, and you really only needed to save 20% or 15% now, that’s money that you actually could have been putting into your business so that you can grow and scale. So, you’ve actually slowed down the growing and scaling process. But if we’re just being 100% honest, most of my clients are paying maybe between 10 to 20% of income to taxes. So, 40% is very rare, and that’s even with the wealthiest clients that I have.

Dayna Thomas, Esq.:
Yeah, in my experience, I think 40% is high too.

Jayden Doye:
Now granted, if someone is not doing any type of tax planning, and they have a profitable business there is a chance that it could be 40%. But that just speaks to the benefit of working with a professional for your tax planning needs. Because the cost that you pay for tax planning services is a fraction of what you will save in taxes after you implement the strategy.

Dayna Thomas, Esq.:
That makes perfect sense.
So, one thing that I also want to ask about that I know that a lot of entrepreneurs have to deal with. So this is a scenario, a full-time entrepreneur, they want to buy a house next year. All their income is from their business. And so, they have a decision to make because they want to show enough income so that they can qualify for the house that they want as a full-time entrepreneur, but they don’t want to show too much income because then, you’ll get taxed on all of that. So, what do you advise an entrepreneur that goes through something like that? Or they just have to suck it up for that year.

Jayden Doye:
If we just being 100% honest-

Dayna Thomas, Esq.:
Please.

Jayden Doye:
I don’t baby, my clients. I just rip the bandaid off and I say, “What do you want? Do you want a life of abundance? Or do you want to think small for the rest of your life?” So let’s just plan for it. If you know that you have to have an income of $100,000 in order to get approved for that loan, then maybe we won’t get as aggressive on the expenses.
I’ve heard many different strategies that, quite frankly, are borderline fraud. And I don’t do fraud. I have a license to uphold.

Dayna Thomas, Esq.:
Absolutely.

Jayden Doye:
But I think where the planning comes in is being aggressive with the expenses. Sometimes entrepreneurs won’t claim as many miles, or they won’t claim as many meal expenses, and things of that nature so that they can get approved for that home. But, at the end of the day, as long as you plan early enough, and you’re paying your taxes every quarter, then when you go through the process for a mortgage it’ll be a smooth process. Because when you go through that process of applying for a mortgage, they look at your debt. So, what you don’t want to do is wait until you fill out the paperwork to apply for a mortgage to do your taxes and find out, wow, I have a $10,000 tax liability. They will put that in your debt to income ratio.

Dayna Thomas, Esq.:
And it’ll mess everything up.

Jayden Doye:
Right. And that can mess up the money that you would be putting down for a down payment.

Dayna Thomas, Esq.:
That’s right.

Jayden Doye:
Yeah so honestly, if we’re just being 100% honest, most people that are in that process where they actually have the funds to buy a home, it’s just the transition of the mindset of saving for taxes, and paying on a quarterly basis that is difficult for them. But I always recommend, if your business is profitable show that you have a profitable business.

Dayna Thomas, Esq.:
Absolutely. So, that makes sense. So, essentially, what I’m hearing is for that year, you can’t have it both ways. But you can plan accordingly with your CPA to make sure that it will be a smooth process as much as possible.
So, Jayden I have learned so much, I’m sure that our viewers have as well. And I know they want more of you. So, how can they keep in touch with you and learn more about your services?

Jayden Doye:
Absolutely. So, if you text CPA to 21000, they’ll get my digital business card. And from there they can find my Instagram, Facebook, LinkedIn, all the various ways to stay in touch with me.

Dayna Thomas, Esq.:
I love that. Thank you so much. And you definitely have to come back because there’s more in that wonderful brain of yours that we can learn from.

Jayden Doye:
Absolutely.

Dayna Thomas, Esq.:
Thanks Jayden.

Jayden Doye:
Thank you.

Dayna Thomas, Esq.:
Well, I hope today’s show helped to educate and inspire you as you pursue your business goals. Be sure to share today’s show with someone who can benefit and visit MyASBN.com and subscribe. If you have any questions or comments about today’s show, I would love to hear from you, send me a message or comment on Instagram at @daynathomaslaw. Remember to tune in next week and every week to make sure your business is launched and legal.