I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
Getting Tax Smart in a 3 Step Process
|
Over the last week I, along with 10 million others π, saw Dan Koe's X article on how to change habits realistically. If you didn't see it, it's worth the read ‡οΈ
This resonated because one theme that constantly comes up in new client calls is a dissonance of tax efficiency. Business owners are unsure if they are being the most efficient they can be and want help from someone who has walked that path. π€·ββοΈ But being tax confident is not something you can buy. It means ownership and comprehension of the most impactful parts of your tax plan. If one of your goals in 2026 π is to become better at understanding taxes and how to avoid them, here's a helpful path to follow: Identify the Biggest VariableWe want to eliminate surprises in tax. π No one likes them. And to business owners, the primary variable that drives surprises is how much taxable income the business will make. βοΈ If we can get this number right, the only other variable that really matters is tax law - which changes much slower. So it may sound counterintuitive, but if you want good tax planning we need to start where the variables that impact taxes begin - the financials. If you don't use a budget or have a projection into the next year, it makes it challenging to accurately predict cash flow impacts of taxes for the next 12-18 months. π΅βπ« Revisit Tax StructureNext up is tax structure, and we look at two drivers π€ to get it right:
Income streams are important to get in the right entities. For example, income that is eligible for a qualified business income (QBI) deduction ποΈ may need to be directed through a S-Corp to maximize that deduction. Similarly, a S-Corp can help mitigate self-employment tax πββοΈ on profit distributions over a reasonable salary. Each of these items can save hundreds of thousands of dollars π΅ in tax over the life of a business owner. Balance sheets - a topic near and dear to my heart, but neglected by many tax pros - are equally important. Understanding how the entity will be capitalized π¨βπ©βπ¦βπ¦, what assets will be retained inside the business π₯οΈ, and how much and what type of debt will be used π§ all drives which entity type to use. For example, if you're raising capital to buy real estate π«, a S-Corp is very likely not the right choice. Because S-Corps are limited on the type of shareholders, and variation in how they can receive return on capital (no profits interest), partnerships are the most common choice here. On the other hand, if the business is a cash cow π and there's no tangible appreciating property, a S-Corp may be just the right vehicle. Know Your Tax AvatarThis takes time to develop and where the experience of the tax pro really matters. βοΈ What do we mean by Tax Avatar? What we're trying to get down to is "what are the tax strategies someone in my situation normally uses." Business owners want to be put in a bucket πͺ£ with other taxpayers and be told what everyone else is doing. πββοΈ We've addressed that by creating Taxpayer-based Avatars and Event-based Avatars that we can reference π when planning out tax strategy options for current or potential new clients. Our taxpayer-based avatars π€΅ββοΈ are:
For each of these, we've tagged anywhere from 5 to 20 tax strategies to reference when creating tax plans. Our event-based avatars π§βπΌ are:
Same thing as the taxpayer-based avatars, each of these has 5-10 strategies tagged to it for quick reference. The problem is there is no standard here. π So you are at mercy of your tax pro to βοΈ identify opportunities, and βοΈ execute on them. It's not an easy lift, from experience. The best question to ask here is "what do other people in my situation do." When we get asked that, we can reference our working list of common strategies for that taxpayer or events as ideas. The TakeawayStart at the top. πΌ If you want to pay less tax, get better financials and create a budget. Then tighten up on structure and tax strategies that other taxpayers similar to you use. As always, reply to this email for feedback or if you want to talk more about working together for tax strategy and compliance. Don't forget to read Dan's article linked up top, it's great advice for how to meaningfully change behavior. Hoping all the best for everyone in 2026 and beyond. And also, go Texans! π π«‘ Meme Cleanser π§Ό
Want to read previous issues? Click here.β |
The Plug [Newsletter]
I've been a CPA for nearly 20 years - serving private small business and real estate the entire time. I take the lessons learned in serving and now running a small business and share them here. For business owners, investors, and advisors looking to lower their cost of capital, subscribe for delivery straight to your inbox π Also on YouTube at PlugAccountingandTax!
The IRS doesn't care what you meant as much as it cares what the document says. Your tax pro has to file returns based on what the document says. If those two things are not aligned, you pay for it. Most operating agreements handle the legal relationship well. βοΈ Few handle the tax reality. Here are five questions to bring to your CPA before you sign the next operating agreement: 1) Does the allocation language match the deal you're actually making? Most owners read the distribution waterfall...
Our firm has been building and iterating on the next phase of client experience π¨π» and we're excited to share the first look at it. Here's what it feels like what it will do π: Avatars and Life Events We started plotting out the most common tax strategies π a few years ago. That evolved with documenting a separate Notion page for each major strategy to help our team recognize and execute that item. Things like, "where to find this," "how to calculate it," and "how to know it works" are all in...
Every year, countless small business start-ups hear about the Qualified Small Business Stock (QSBS) exclusion and lock in π on that being their ticket to a tax-free seven + figure exit. π° And for some, it is. But a bigger percentage of others never make it there. Or worse, they get there and don't have a qualifying stock sale. π«£ Today, we're talking about one way to bail out of a QSBS set-up without being double-taxed to death. QSBS Background For anyone not in the know, QSBS is an exclusion...