Episode 303

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Creating a solid tax strategy for your agency might not seem like the most exciting thing to think about but doing so has the potential to put a lot more money directly into your pocket. It can be daunting to try and understand all of the options available, especially when a lot of the COVID-related aid adds to the confusion, so having a solid tax advisor in your corner is more important than ever. But how can you make sure you’re getting the guidance you need if you don’t even know what questions to ask?

Craig Cody is a tax strategist and planner who has helped many AMI members better manage their money. His insights and guidance are hugely beneficial to any agency owner wanting to save money while also leveraging income and assets for personal and professional goals.

In this episode of Build a Better Agency, Craig and I discuss all things taxes. We look at COVID-related strategies that are still available. We explore surprising deductions to be found by better leveraging your home and how to get the most out of your relationship with your tax advisor, all with the goal of setting up you and your agency for the best possible financial success.

A big thank you to our podcast’s presenting sponsor, White Label IQ. They’re an amazing resource for agencies who want to outsource their design, dev, or PPC work at wholesale prices. Check out their special offer (10 free hours!) for podcast listeners here.

Agency Owner Tax Strategies

What You Will Learn in This Episode:

  • COVID-related tax strategies that are still available
  • Understanding The Augusta Rule
  • How putting in a home pool can be tax-deductible
  • Knowing the difference between a tax strategist and a tax preparer
  • What to expect tax advisor conversations to look like
  • The Defined Benefits Program
  • Common missed opportunities in tax preparation
  • Questions to ask a new tax advisor
“It’s important when filling out the COVID-related forgiveness form that you talk to your CPA so you make sure you maximize it.” @craigc2742 Share on X “EIDL loans are still happening.” @craigc2742 Share on X “The Augusta Rule allows you to rent out your home to anyone - including your own business - for up to 14 days a year and you don’t have to claim that money as income.” @craigc2742 Share on X “With a home office, you are allowed to have a home athletic facility, including a pool, that becomes tax-deductible.” @craigc2742 Share on X “You’ve got to make the time to ask ‘What can we do a little bit differently?’ and it turns into a lot of money.” @craigc2742 Share on X “The more you’re making, the more opportunities there are.” @craigc2742 Share on X

Ways to contact Craig Cody:

Tools & Resources:

Speaker 1:

If you’re going to take the risk of running an agency, shouldn’t you get the benefits, too? Welcome to Agency Management Institute’s Build A Better Agency Podcast presented by HubSpot. We’ll show you how to build an agency that can scale and grow with better clients, invested employees, and best of all, more money to the bottom line. Bringing his 25 plus years of experience as both an agency owner and agency consultant, please welcome your host, Drew McLellan.

Drew McLellan:

Hey, everybody Drew McLellan here with another episode of Build A Better Agency. I’m a firm believer in it is awesome to make a lot of money, but it is even more awesome to keep more of the money that you make. I think that’s how agency owners win the game is not about gross billings, which I think are irrelevant, but it really is about what you’re able to keep at the end of the day, at the end of the month, at the end of the year, and how you’re able to use that money to reward your people to benefit the team that serves you, to benefit yourself and your family.

And I am not in the least suggesting that we not pay our fair share of taxes. But what I am suggesting is how shameful it is when we pay one penny more than we have to pay when legally there are ways for us to not pay more money out and we do anyway, out of ignorance or bad systems or bad processes or a bad partner when it comes to our CPA or our tax preparer. There’s a huge, huge difference between a tax preparer, which is somebody that you bring a box of receipts to at the end of the year or you print out your P&L or whatever it is. Somebody who just fills in the boxes as opposed to somebody who is talking to you on a regular basis throughout the year, helping you put together strategies.

And so today, my guest is Craig Cody and Craig is a CPA, he’s got a really interesting backstory that I’m going to let him tell you a little bit about, how he came to be a CPA and a tax strategist, but we’re going to talk about a lot of things. I want to certainly talk about the new tax law. I want to talk about some of the deductions that are often overlooked by business owners and particularly agency owners, but I also want to touch on some other things just in terms of financial health. And a great CPA, a great tax consultant, or a tax strategist isn’t just about your taxes, they are also helping you figure out how to run your business better from a financial perspective, and how to make sure that you have all of your ducks in a row financially, so that again, you can keep as much of the money that you make as possible. So with that, let’s get him on the show.

And so with that, I want to welcome Craig to the podcast. Craig, welcome to Build a Better Agency.

Craig Cody:

Drew, thank you very much for having me.

Drew McLellan:

So, give everybody a sense of your background. You have an interesting origin story of how you came to be a tax consultant. So, tell people a little bit about that.

Craig Cody:

Sure. Well, my prior life, as I’d like to say at this point, because it’s been so many years, I was New York City police officer, I retired in 2000, just before 9/11 as a lieutenant. And I went into the accounting field. I worked for international tax firm for a number of years, and eventually went out on my own per diem, which is a wonderful thing about accounting. And then at some point, I started out, just running my own business, and we specialized, we grew to specialize after the changes in the state tax rules to tax planning for business owners. And that’s the focus of what we do. Everything for us right now focuses on tax planning.

Drew McLellan:

So, how does one go from being a cop to being an accountant? Because that’s a weird transition.

Craig Cody:

I get that a lot and it is a different transition. Typically, people that transition into the professional field go into law. And so, I was kind of the odd man out, but I was always into numbers. I thought I was going to originally work on Wall Street and I was an Economics major my first time around. But I will tell you, it’s definitely, when you sit down with somebody and you save them some big money, it’s very exciting. And you get that adrenaline rush that you do chasing a perp down the street. I know it sounds corny, but it’s true.

Drew McLellan:

Yeah. One is probably a little safer than the other, right?

Craig Cody:

Yes, yes, yeah.

Drew McLellan:

Yeah, yeah, yeah. So, I know and we’ve talked about this on the show before with other guest, but I am a firm believer and one of the things that I preach in some of the workshops that we teach is this idea of there are tax preparers, somebody who fills in the blanks on the form. And then there are tax strategists. Talk to us a little bit about the difference between the two and if I, the consumer, if I’m an agent agency owner, what does my interaction look like with each of those people on the spectrum? Because I think there’s a huge difference.

Craig Cody:

Definitely. So, if you’re a tax preparer, you’re basically putting the right numbers in the right boxes and you could be doing a great job at that, but it ends there. When you’re a strategist, and there’s a lot of strategists out there, what you’re doing is you’re communicating with your clients on a regular basis throughout the year and you’re coming up with ways that are legal, okay, to make things that they’re doing tax deductible, okay?

So, you’re taking the planning time that someone takes when they’re buying a car, they do all this research. Just using that, for your accounting. And I’m a big believer in communication, open communication, talking on a regular basis with your CPA, because they don’t know what they don’t know. So, if they don’t know what you’re doing, they can’t help you. And going through that tax preparer in March or April, honestly, he doesn’t have time, number one, to help you and it’s too late anyway.

Drew McLellan:

Right, it’s after the fact. It’s after the year or it’s after the purchases have been made or the money has been spent, or whatever. I always picture a tax preparer is that’s the guy that you bring the shoebox of receipts to, and say, “Okay, I’ll be back next week and pick up my tax forms and sign them.”

Craig Cody:

Right. And being a tax preparer doesn’t mean that you don’t have the education or anything like that, it just means you’re just focusing on putting the right numbers in the right boxes, which is fine, but as a business owner, you want somebody that’s going to do more than that for you and you should want that.

Drew McLellan:

So, I know one of the things that is critical if you are actually a tax strategist is the understanding, and this I think, is sometimes challenging for the listeners to wrap their head around, but they can’t just understand your business, they have to understand your financial life and your financial goals and where you’re trying to get because tax strategy isn’t a one and done sort of thing, is it? It’s not a, “For2017, here’s the plan,” but it’s really a “Look, I’ve got this bigger lifelong goal set and these things I’m trying to get done. And 2017 is just one year that contributes to those goals.”

Craig Cody:

Right, and it’s an ongoing relationship. And that’s why, I always preach, “Speak with your CPA, talk to them on a regular basis,” because he needs that information. And what we do and what a lot of people that do planning is they reach out to their clients on a monthly basis to say, “What’s going on. Let’s review the numbers, because, as you know, it’s important to know your numbers. Let’s review them.” And then when you have that conversation, things come up. Just, “I’ve been thinking about doing this or I’m going to make my building into my primary residence, so I could sell in two years and not pay any tax.” And like, “No, no, you can’t do that.” And how do you plan for that? So, what’s another way you could go about trying to make that a tax free sale down the road?

Drew McLellan:

So how often, if I’m running a $2 million gross business, how often should I be talking to or meeting with my tax strategist?

Craig Cody:

Well, things like Zoom and Skype make it very easy. You should be having that conversation, at least monthly.

Drew McLellan:

Okay. And what kind of metrics am I looking at? What kind of numbers should, as a business owner, you said, “Boy, you should hang out. You should know your numbers.” What numbers do you think matter?

Craig Cody:

Well, from obviously-

Drew McLellan:

From a tax perspective?

Craig Cody:

From a tax perspective, obviously, the big number is your net income, right? But you want to look at what your sales are, how they’ve grown, what is your cost of goods? What’s happening? Because, ideally, you’re looking at comparative numbers, so “How did I do this month versus last month or last year versus this year, et cetera?” There’s different things you can look at comparatively. And you could see, “Am I spending more money? Am I spending a lot more money in marketing, and I’m not getting my bang for the dollar?” or “Oh, God, I increased my marketing, look what it did to my sales.”

If you don’t look at that stuff, you don’t know. I mean, you might think you’re doing well because there’s money in the bank account, but maybe something else happened that caused the bank account to grow. So, and by knowing how much income you have, you could figure out, “Okay, what kind of additional planning do I need to do?” So, I think somebody in the $2 million range should be, there’s no reason not to have a conversation once a month.

Drew McLellan:

Yeah. And again, I’m probably providing some financial metrics or forms, information to my tax preparer or my tax planner, and then we’re having a conversation around it, right?

Craig Cody:

Correct. And if you’re in a certain field, where there are metrics out there and you want to see how you stack up against those metrics, that’s all the better and if that’s one of your goals to get more in line with those metrics, that’s another reason why you want to have that meeting or talk. And people always look at it as accounting fees as an expense item. And I say, “Don’t look at them as an expense, look at them as an income because the more you communicate, if you’re communicating with the right people, they’re going to save you money, which is going to give you more in your pocket.”

Drew McLellan:

Yeah. Yeah, yeah. We have a one-page Excel spreadsheet that sort of maps out the metrics for anybody who’s listening to this podcast. They’re the metrics that matter to them in terms of how their AGI gets proportioned out and what their AGI should be per full-time equivalent and things like that. So, a lot of our folks will send that Excel document along with like P&L or comparative P&L to their tax strategist to sort of begin to have the conversation around how are we doing against the industry metrics?

Craig Cody:

Right, right, which is good information. Am I doing great? Am I doing terrible? Okay, let’s now, let’s see what we need to tighten up.

Drew McLellan:

Yep. Well, and again, that to your point, I mean, every industry I mean, obviously, everybody who’s listening to this is in the same industry, but every industry has sort of metrics that are specific to that industry. And so, one of the things I think it’s important is that we, the business owner, also, it’s a two-way street of education, we also have to educate our tax strategist about the best practices that are appropriate for our industry, because we can’t expect someone you to know everything about the marketing and advertising agency, sort of best practices. We have to teach you that stuff, so you could help us achieve those goals, right?

Craig Cody:

Communication is two ways. It has to be two ways.

Drew McLellan:

Yeah, yeah. So, by the time everybody listens to this, they will have sort of gotten over their shock around the new tax laws. From your perspective, political affiliation, what it does to people in different socioeconomic classes, all of that aside, is the new tax law, in general, good for small businesses or is it going to make things harder for us to keep our own money?

Craig Cody:

I think it’s good for small businesses. One of the big things that’s great for small businesses is it’s called Section 199, and that’s the 20% deduction that you’re going to get for passthrough income. And we’re still waiting on the Treasury to put out some regulations as far as who is subject to limitations and who is not. But there are some people, whether they’re called consultants, professionals, where there’s a limitation on to what their taxable income can be in order to take advantage of this 20% deduction and then there are others that have no limit. So, let’s just say you have a K1 for $300,000, you’re going to wind up with a 20% or $60,000 deduction, on your personal return. And in the 24% bracket, that’s a lot of money.

Drew McLellan:

Absolutely, so how does it change? So, many of the listeners have probably been running their business for a while. They’ve been sort of used to the old tax laws, what behaviors need to change with this new tax regulations and laws? What were things that we used to do, that we won’t be able to do anymore and we have to find a new way to do it.

Craig Cody:

Well, entertainment is one that’s out. Okay? So, that’s a big one, that is-

Drew McLellan:

Don’t you think that, so I think about entertainment and I think about all of the agency owners that have season tickets for, fill in the blanks, whether it’s the opera or the Chicago Cubs, and they take clients to those events, and all of that. Don’t you think that a lot of those entities are going to come up with a new way of classifying like it’s a sponsorship or it’s something else, and “Oh, by the way, you happen to get season tickets with that thing.”

Craig Cody:

Right, but there’s a value placed on all that. And if you’re just trying to wrap it in something different and it gets looked at, it’s not going to pass muster. So, let’s look at the things that you can do, that we know you can do, that are tried and true and communicate with your tax person. And that’s the big thing, where what they should be doing now is, they should be having that conversation now with their CPA.

And make sure the conversation isn’t revolving around, “Okay,” and this is typically where the conversation goes is, “Okay, what do I need to change my estimated payments to?” That’s not the conversation you want to have, because that’s being very reactive. You want to be proactive and say, “Okay, what can we do to take full advantage of the new tax law?” That’s where the conversation should be. Because I get too many people coming in and said, “Yeah, well, I did tax planning with my CPA in December and he told me I had to make this $20,000 payment. I’m like, “That’s not planning, that’s just being reactive and making the proper payment.”

Drew McLellan:

Right, right, so in terms of the planning, what kinds of strategies are you talking to your clients about now in light of the new tax law. So, what are people doing to take full advantage?

Craig Cody:

So, whether it’s 401Ks, whether it’s the home office, whether it’s the self-rental out there, okay, renting your home to your business, whether it’s having a management company to move some money around, making sure you have the proper number, sometimes, especially in the remote world, nobody’s an employee, they’re all 1099. And with Section 199, I know there’s a lot of 99s in there, one of the metrics for getting that is W-2 wages. So, you want to make sure that you have the right amount of people that are on W-2 wages, so you don’t lose out on this deduction, so.

Drew McLellan:

Can you explain that a little more, because you’re right, especially in our world, many, many agencies are supplementing a smaller. So, before the recession, agencies were bigger and everybody was a W-2. Agency owners hated the idea of using contract labor when they could have that talent in-house, because the theory was, it was less expensive to the agency to have the person on staff than it was to pay freelance rates.

And when the recession hit, a lot of agencies had to because they had to move some of their fixed costs to variable costs. They had to move from a W-2 kind of model to more of a 1099 model. And today, most agencies regardless of how big they are, are sort of a blend of W-2, so employees and contractors. And this new tax law, especially with this 20% deduction, all of a sudden begins to suggest, I believe, that there is value in a W-2. So, can you explain that a little bit?

Craig Cody:

Sure. So, Section 199 is the code that we’re talking about and it basically says, you get a 20% deduction on your personal return for let’s just call your K1 number. So, the K1 $200,000, you get a 20% deduction on your personal return, but that deduction is limited up to 50% of your W-2 wages. So, depending on how you’re structured and how you’re taking income, you want to make sure that you actually whatever that deduction is going to be that you have ample wages to cover that. So, if it’s $300,000, that means a $60,000 deduction, you better have at least $120,000 worth of wages that you’re paying. And we believe it counts the owner, okay, but we were waiting for guidance once again from the IRS.

Drew McLellan:

I’m curious how and when does that guidance come?

Craig Cody:

I wish I had a crystal ball.

Drew McLellan:

It feels a little nebulous.

Craig Cody:

Yeah, it is nebulous, it is nebulous. And you just have to be on the lookout for it. And we’re hoping to have some good guidance by the time tax season is finished on April 15th that they’ve come out with the information. I’m part of a group and there’s about probably over 100 of those nationwide and there’s probably about 20 of us that get together on a regular basis and we got together in January for that. We’re getting it together in May, just so we could all compare notes. What have you found? What have you figured out? So, yeah, it’s all about being proactive. But the government, they do things the way they want to do things.

Drew McLellan:

But when they want to do them, right?

Craig Cody:

Exactly. Sit with your CPA, have that conversation with your CPA, and make sure that, “You know what? Okay, I’m going to be good. This is not going to be a limiting factor.”

Drew McLellan:

Yeah. I know that part of the work that you do with clients, a lot of the work you do with clients is around taxes, but you’re also providing them with just good financial CPA guidance as a general rule and a lot of our lot of our listeners aren’t in the US, so some of this tax stuff may or may not apply to them. But there are some best practices in general around some financial metrics that I’m sure that you coach your clients around. What are some of the basics that every business should foundationally be looking at, be tracking and be sort of letting guide some of their decision making?

Craig Cody:

Well, your books should be up-to-date on a regular basis, so that should be monthly. Your books should be updated every month because that’s the first metric you’re going to look at. And if they’re not updated, it’s all a feel. “Yeah, I think I’m doing well, but I don’t know.” But if you update them every month, then you can see exactly how you’re doing compatibly, so that’s-

Drew McLellan:

So, hang on. I want to stop you there for a second. So, I have some agency owners who have some, a bookkeeper and accountant, whatever on staff, and what they say to me is, “Well, we don’t close our books for let’s say January until two or three months down the road.” And that to me seems crazy. Is there any reason why someone, a business cannot close their books within 15 or 20 days of the month end?

Craig Cody:

Maybe if you’re GE, but the typical agency, I would say, no.

Drew McLellan:

Yeah. Right. So, that should be a warning sign, right? That there’s something not right in your accounting department. They cannot close, and sometimes it’s the tool, sometimes agencies, agency owners force their accounting people to work on arcane software that is a mother to get done and to get everything loaded. So, sometimes it’s a tool, but it also may be a person, but for the most part, if towards the end of February, you don’t have January closed, and you don’t have all the numbers that should be red flag number one, right?

Craig Cody:

Yes, yeah. If that’s happening on a regular basis, that should definitely be red flag number one.

Drew McLellan:

Okay, so what other sort of best practices or metrics? So, my books need to be closed every month? I need an accurate current numbers. What else?

Craig Cody:

Exactly. You want to be looking at t