Episode 157:

We are hip-deep into 2018, and the new tax law is fully in effect. It’s past time to get a handle on the implications of the new law for your business because we only have a few months left to do any sort of planning before year end.

Many agency owners are not exactly “numbers” people. The default, too often, is to let other people handle the money, then go off and focus on the creative or strategic side where we can play to our strengths.

On episode #157 of Build a Better Agency, I talk with CPA and tax advisor, Craig Cody. Cody definitely wants you to partner up with a professional when it comes to number-crunching. But in our conversation, he makes no bones about it: you’ve got roll up your sleeves and get your hands dirty. You can’t check out of your business’ finances, no matter how much you trust your internal or external advisors.

So, this is a great and very timely conversation. Did you know you can hire your kids and enjoy some significant tax advantages? Craig serves up a ton of tax tips, deduction hacks and best practices on everything from dispelling the myths about deducting a home office to paying for medical expenses, along with the basics of keeping up with the books.

A tax advisor – not just a tax preparer – can be a huge benefit for your bottom line. I had a great time talking with Craig. I learned a lot, and I know you will too.

Craig Cody is a Certified Tax Coach. His practice is rooted in tax planning. His philosophy is to find ways to legally reduce tax liabilities and keep more of what clients earn in their own pockets.

As a Certified Tax Coach™, Craig belongs to a select group of practitioners throughout the country who undergo extensive training and continued education on various tax planning techniques and strategies in order to become, and remain, certified. With this organization, Craig co-authored an Amazon best-seller, Secrets of a Tax-Free Life. In addition to tax planning, Craig’s practice offers traditional tax services as well as remote CFO services.

 

 

What You Will Learn About in This Episode:

  • The big differences between a tax preparer and a tax advisor
  • Why tax planning for entrepreneurs can make a huge difference in how you manage your finances
  • Passthrough income potential in Section 199 of the new tax code
  • How long it should take to gather P and L information for the previous month
  • Aspects of the new tax laws that you might not have considered
  • How frequently to be in contact with your tax advisor
  • How to find a good match for you in a tax advisor
  • The wrong kinds of tax deductions to take
  • Tax benefits of hiring your school-age children
  • Steps to take in order to avoid fraud and theft within your business

The Golden Nuggets:

“Don’t just look on the expense side when you are paying accounting fees. If you are working with the right people, they will save you money.” – @craig2742 Click To Tweet “Your books should be updated every month because that's the first metric you're going to look at. Otherwise, you might think you are doing well, but that’s just guesswork.” – @craig2742 Click To Tweet “If last month’s books are not closed by the end of this month, that should be a red flag that something is not right.” – @craig2742 Click To Tweet “As an agency owner, you should be looking at all the checks. Fraud happens when the person who approves and signs the checks gets too busy to pay close attention.” – @craig2742 Click To Tweet

 

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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 those checks. What’s being paid out? I mean, I cannot tell you how many times if you’re not the guy writing the checks, okay, you really should be. There’s so many easy systems out there where you could have somebody else do all the work such as like there’s a bill.com. Somebody else could do all the work, but you’re the guy that approves that check. I’ve seen more fraud happen in the office, because everything’s running on 10 cylinders. And nobody’s looking and the next thing you know, things change a little bit and they start looking at the numbers and they’re like, “Oh, my God. These American Express payments weren’t my American Express card.” And it’s not even rocket science for it, it’s just basic, instead of paying your Amex, they’re paying their Amex.

Drew McLellan:

Right, right. Yeah. You know what? I wish I could say, “Boy, that doesn’t happen.” But a lot of agencies that we work with, have been victims of internal fraud, and it typically is either the accounting person or it’s their business partner. And if you don’t have checks and balances in place, that’s a problem. What’s what sort of checks and balances should I have in place to protect myself against fraud?

Craig Cody:

Well, I mean, you should have somebody reviewing, if you’re not reviewing all that stuff, you should have somebody outside of your organization that’s looking at that stuff and is actually asking question. Because it’s one thing to say, “I’m looking at it,” okay? It’s actually another thing to actually say, “I’m looking at it and I’m asking you questions.” All right?

So, case in point, every month when we have our call with a client, there’s going to be a couple checks that are just odd. Okay? And we’re going to ask, “What’s this for?” And it’s always typically, there’s a good reason for it, but and I have a background in law enforcement, asking questions and letting people know that questions are being asked is kind of like it just creates the atmosphere, “Well, if I try and do something, okay, somebody is going to look at it, and I shouldn’t do it.”

Drew McLellan:

Yeah, I’m going to caught, yeah.

Craig Cody:

Right, so and trust but verify. If somebody is working for you, I would hope you trust them, but there’s no reason not to verify. And the partnership thing is, yeah, I mean, that’s the age old story. I want to think if you’re a partner in a business, that you both have access to the bank account and you’re both looking at it, but I’ve seen it over and over, where you have one person that has control and like, “Why does he have control and you don’t have control?”

Drew McLellan:

Well, a lot of times the partner who ends up being the victim of the fraud is the one who abdicated control. It’s like, “Okay, well, I’m going to work on the client part of the business, you work on the administrative part of the business.” And typically, it’s something they don’t enjoy or they don’t understand, so they’re happy to let someone else do it until they’re $400,000 in the hole.

Craig Cody:

Exactly. And I’m going to just pop out one name out there is bill.com and I don’t get any money from them or anything like that, but we just had a client that was spending a day a month writing out the checks and going through this whole process, all right? Because he was concerned about the whole fraud thing. We set them up on bill.com. Everything gets uploaded, it gets moved over, it gets approved. And then he gives it the final approval, he hits the button and he gets paid, so he’s done within two hours.

Drew McLellan:

Yeah, yeah. Yeah, there are a lot of tools out there that makes the accounting…

Craig Cody:

Technology.

Drew McLellan:

… world faster and more efficient and also quite honestly, more easy to check on. And make sure that these kind of things aren’t happening to you.

Craig Cody:

And you want to also look at when you’re looking at your numbers, you want to look at your credit cards, and you want to make sure that that’s actually being reconciled also every month, because that’s another way to uncover fraud where if it’s not being reconciled. And unfortunately, a big area is always payroll taxes, okay? Where the taxes get paid someplace else. And-

Drew McLellan:

And the government is not sympathetic to that problem.

Craig Cody:

They could care less.

Drew McLellan:

Right. Yeah, yeah. Okay, so let’s go-

Craig Cody:

They really-

Drew McLellan:

Let’s go back to, so my books should be closed out every month. My credit card statements also closed out every month. What are some metrics that I, at a glance, so most agency owners don’t have a finance background, and most of them quite honestly, other than they to make money, don’t enjoy the money part of their administrative tasks. So, what are some numbers that if they can kind of get glance, sort of a dashboard, they can glance at it and go, “Okay, we’re pretty healthy.”

Craig Cody:

Right. So, okay, one thing is, based on your industry, what should your gross profit be? So, what’s your sales, less cost the goods, you get your gross profit. Is there a metric for that?

Drew McLellan:

We call that AGI, yep.

Craig Cody:

Okay, if there’s a metric for that. How about salaries? Is there a percentage where salaries should be a percentage of your sales? Is it 30, is it 25%?

Drew McLellan:

Yeah, so for us, it’s 55% of your AGI.

Craig Cody:

Of that? Okay, so that reduced number?

Drew McLellan:

Yep.

Craig Cody:

So, where do I stack-

Drew McLellan:

Yeah, because for agencies, the cost of goods is such a huge variable. If I’m an agency that buys millions of dollars of media, I might be $100 million agency, but $90 million of it goes right back out the door, and I only have 10 million to spend. If I’m a brand consultancy, I have hardly any cost of goods, so if I’m a $2-million agency, $1.8 million might drop down to the AGI line, because I just don’t have a lot of cost of goods. So, for us in our world, it’s all about AGI.

Craig Cody:

Correct. That’s like the profit first method, which makes a lot of sense.

Drew McLellan:

Absolutely. Yeah.

Craig Cody:

So, and then you look at, so you look at what your salaries should be, are they in line? And then, maybe your salaries aren’t in line, but maybe there’s a reason for that, right?

Drew McLellan:

Yeah, right.

Craig Cody:

Maybe, you’re at the point where you don’t want to work, a 16-hour day and you would say, “Okay, I’m okay with taking on another person, so I could have a life.” So, you look at that. Obviously, your interest expense, what should it be? Why is it? I don’t know if you guys have chargebacks and stuff like that?

Drew McLellan:

For the most part, no. Yeah, yeah.

Craig Cody:

But your fixed expenses, what’s going on? Where should they be? Obviously, rent differs by the region. So, but I like basically, what should your gross be and basically, where should your salaries stand out, basically, versus whether it’s your AGI or your gross number?

Drew McLellan:

Yeah. Awesome. I want to talk a little bit about sort of the pattern of tax strategy planning when we come back, but let’s first take a quick break and we’ll talk about that.

If you’ve been listening to the podcast for a while, odds are you’ve heard me mention the AMI Peer Networks or the Agency Owner Network and what that is really is that’s, it’s like a Vistage group or an EO group, only everybody around the table owns an agency in a noncompetitive market. So they as a membership model, they come together twice a year for two days, two days in the spring and two days in the fall. And they work together to share best practices, they show each other their full financials, so there’s a lot of accountability. We bring speakers in. And we spent a lot of time problem solving around the issues that agency owners are facing. If you’d to learn more about it, go to agencymanagementinstitute.com/network. Okay, let’s get back to the show.

All right. Welcome back and I’m here with Craig Cody, and we’re talking about tax preparation and best practices in terms of accounting and your money. And before the break I was saying that, I wanted to talk a little bit about the tax strategy sort of cycle. So, Craig, for you, when you’re working with a client, I know you said that you’re sort of talking monthly, but what’s the cadence of sort of making decisions? So, for many of the listeners, the income that they make is not, our business is not, “Oh, I make the same amount of money every months.” It really fluctuates a great deal by client activity and new clients and loss of clients and all kinds of variables.

So, a lot of times agency owners will find themselves, Thanksgiving time-ish, end in November going, “Oh, shoot, I’m going to have a lot of money. And then of course, the solution is, “We’ll buy a bunch of stuff,” right?

Craig Cody:

Right, and-

Drew McLellan:

And there’s a certain point in time, you’re out of stuff to buy.

Craig Cody:

And I hate when I hear that. Yeah, my attorney, my attorney. My accountant told me to go out and buy a truck or something like that. I’m like, it’s great, yeah, you get a tax deduction, but you lost all that money for something you might not have needed, so it’s all about keeping. What can you do to keep more of what you make? So, you’re giving up 100 grand to get $100,000 deduction, that’s saving you $30,000 in taxes. You’re still netting, you lost 70 grand. You might have a nice truck.

Drew McLellan:

Right. Yeah. Right. But no one needs a new truck every year, right?

Craig Cody:

Exactly, exactly. So you have to look at, “What else can I do?” And when we do the planning, it’s stuff that we’re telling you, “Okay, these are things you need to do throughout the year.” And when you have those conversations with your accountant throughout the year and he sees the numbers, “Okay, make sure you take care of this. Do this now. You didn’t do this or you did this, okay, now, let’s go on to the next step.” So, if you have a plan, it doesn’t mean you have to write that check every month for whatever it is, but as you’re moving and you’re making money, then you have to make sure you’ve taken advantage of all the things you’ve talked about because as we know, execution is a key.

Drew McLellan:

Well, and there are a lot of things that you can’t do in November. You don’t have enough time, you don’t have enough ramp to get it done, but when you’re talking about it in March or April, you do have time to sort of over the course of the year make moves that allow you to actually keep more of your profit as opposed to spending it just to avoid paying tax on it, right?

Craig Cody:

Right, which is a really bad thing to do is spend it just to avoid the tax.

Drew McLellan:

Right. So, what are some common, I’ve jotted down a couple of things when we were talking earlier, one of the things you mentioned is the home office. And it seems everyone believes that if they take a home office deduction, the minute they write that down on a piece of paper, their doorbell is going to ring and there’s an IRS agent at the door, demanding that they prove that they work at home. Is that a myth or is that true? Is it a red flag for audits?

Craig Cody:

No. And the IRS even came out with a safe harbor a couple of years ago. Here’s what you need to do. You need to document that you have a home office. You need to document your space. You need to take a picture or pictures. You need to use that space only for the home office. You need to spend about 14 to 15 hours a week working out of that home office. And I think most people that are in business are spending that time easily whether it’s writing and answering emails or doing billing or whatever it is that you do. So, that should not be a very high bar to hit.

Now, there used to be something called the home athletic facility that up until the new Tax Act, you were allowed to deduct the cost of your home gym or your athletic facility that might have been your pool, but they did away with that with the new tax bill. But having a home office allows you to drive to if you have another office. And now that space is that that distance is deductible and stuff that. Documentation is key. Whatever you’re doing, you should be documenting.

Drew McLellan:

Yeah. So, one of the, I think, often not understood possible tax deductions, and you referenced it in passing, was the idea of renting your home to your business. And so that’s, if I’m right, I believe that’s called the Augusto Rule, right?

Craig Cody:

Correct.

Drew McLellan:

Can you explain that rule? Because I don’t think very many people are familiar with that.

Craig Cody:

And that’s not even in the code section under the Augusta Rule either, but that’s a kind of a nickname that we’ve given it. Basically, the IRS says you’re allowed to rent your home out for up to 14 days a year and not have to pay tax on that income. We believe it came about basically, the PGA tours are in remote locations where there are no hotels and they wanted to entice people to rent their homes out. So, we have clients where they have meetings with certain staff members, okay, once a month, every the first Saturday of every month, and they rent their home out to the business for that day. And you go and you get what is normal? If you went to a hotel and said, “I want to rent the room for the day,” but I’m not buying anything from you. What are they going to charge you?

Drew McLellan:

Right. Yeah, I’m not booking rooms or whatever, right?

Craig Cody:

Correct, correct. And it’s not going to be cheap, in a way you are. So, that’s the Augusta Rule. So, that’s a way to take money out of the business, move it into your pocket, but it’s legal, and you’re not paying the tax on it.

Drew McLellan:

So, let me just paraphrase this back to you. So I, Drew, could have a standing meeting once a month or I could do quarterly retreats for three days, or whatever it is, but if I’m using my home, as a facility for business, and if I didn’t have my home to use, I would have to go to a hotel or a restaurant or something and rent a room and provide food and all of that. So, if I get fair market value for my region of the country and so let’s say the room rental was $1,000 a day. I’m just going to make this up. Then up to 14 days a year, I can, my business can write Drew McLellan a check for $1,000 and I, Drew McLellan, do not have to declare that as income on my taxes, right? That’s-

Craig Cody:

Correct. You’re not going to pay tax on that. And I would recommend that you document it with a lease. But yes.

Drew McLellan:

Or some sort of rental agreement?

Craig Cody:

Correct.

Drew McLellan:

Yeah, so.

Craig Cody:

That’s exactly the way it works.

Drew McLellan:

So again, so now, so let’s just say it was $1,000 a day, so that’s me taking $14,000 out of my business. And rather than buying a bunch of computers at the end of the year, so I don’t pay tax on that $14,000, now the entire $14,000 goes in my pocket. And I have no taxable event tied to that.

Craig Cody:

It’s a beautiful thing, isn’t it?

Drew McLellan:

It is a beautiful thing, but that’s the kind of thing that a tax preparer does not talk to you about?

Craig Cody:

Correct.

Drew McLellan:

Right?

Craig Cody:

Correct.

Drew McLellan:

What are some of the other things like that you think are often overlooked when someone does not have a tax strategist at their side?

Craig Cody:

I mean, they could be little things like hiring your kids and what is the benefit of that? Let’s just think about hiring your kids for $6,000 a year like they work every weekend, and they do different things for you and you document exactly what they’re doing and you pay them and the money goes into their bank account. And then when it comes time for a summer camp or a hockey camp, or whatever it is, instead of you paying it, they pay for it. Now, you inadvertently have gotten a tax deduction for that money.

Drew McLellan:

Because the first what amount of money is tax free, is it?

Craig Cody:

It’s now it’s around six grand. I don’t have the exact number. But you know what? For young children, we typically don’t go anywhere near that amount. And this is actually something where the Tax Court ruled, “You can do this as young as seven years old.” Now, I personally don’t recommend it unless the child is at least 11, but Tax Court has ruled seven is old enough.

Drew McLellan:

And so, if people who are listening, if they’re like, “Well, what can my seven-year-old do or my 10-year-old do?” So, this is a strategy that I… my daughter is 24 now, but I did this when she was little. And I bring her in the weekends, and she would help me clean the office, or she would empty the waste baskets, or she was great at filing back when we kept a lot of paper files. And we used her for voice talent and we did a lot of things. And what I did was, so she got the check. It went into her savings account.

And then I had a 529 account set up for her college education. And so, the 529 would just go in and grab that money and put it. She was basically making a contribution to her own college fund. So that by the time she was 18 and done with high school, I had college paid for through her working part-time for me. And to your point, the first $6,000 of that income every year is 100% tax free.

Craig Cody:

Right. And we have clients where they use them for Roth to fund Roth IRAs, IRA accounts where now they have earned income and they can do that. And you have the FICA tax to deal with, but depending on the entity you have set up sometimes, you could have it set up through an entity where you’re not subject to the FICA tax. So, it just takes some planning, that’s really all it takes. Just taking that time to have that conversation.

Drew McLellan:

Yeah. What are some other easily overlooked opportunities?

Craig Cody:

Well, another one is medical benefits, so we all know that we get to deduct our health insurance and depending on how we’re set up, we’re deducting it one way or another. But there’s something else called a medical expense reimbursement plan, where depending on the type of entity you are, you can set this up. And it will, you could pay the expenses that are not covered by insurance, you get a dollar for dollar deduction for them.

Whereas typically, let’s just say you needed new teeth and it was going to cost you $15,000, $20,000. Well, you take it as a medical expense deduction on Schedule A, but it’s limited by first, let’s just say you made 100 grand, so the first $7500 is nondeductible, so you lose a big chunk of it. So, if you set up a medical expense reimbursement plan, now you get to deduct every dollar for that. And there’s rules you have to follow, but they’re not tough rules.

Drew McLellan:

And when you set up something that is, is that an executive benefit that’s just for the owner or do you have to offer that to everybody?

Craig Cody:

You would have to offer that to employees.

Drew McLellan:

Okay. Okay. Because there are some things you can do that obviously are like the Augusta Rule, that are just benefiting you without you having to spread that out over the employees. And then there are other strategies where the employees also have to be offered that.

Craig Cody:

Right. And that’s why we have what we call planning. So, we figure out, okay, if you have 10 employees, well, maybe that’s not going to work for you, right? But maybe if it’s just you and your spouse or you and your partner, it’s going to work. So, you have to kind of look at what’s going to work. And do you have real estate? Can you do it in the real estate? So, like I said, take a little bit of time. See what your expenses are going to be, like, “You know what? I have this big…” And I’ll get the call, “You know what, I finally decided I’m going for implants, dental implants. It’s going to cost me $25,000. How do we do this?” “Okay, let’s think about it.”

Drew McLellan:

Right. But again, you have to have somebody on your team that you can have those conversations with?

Craig Cody:

Correct. And there’s plenty of people out there if you look those people up.

Drew McLellan:

Yeah, yeah. Yeah, yeah, yeah. But it starts with the mindset of, “I don’t want a tax preparer. I want someone who is going to be my thinking partner throughout the year, so that I am playing. I want to buy a rental property, I should talk to my tax guy. I want to go on vacation, I want to talk to my tax guy.” Whatever that is, that should be sort of the mindset of is, “I got to figure out a way how do I do this legally through my business in the most tax advantageous way possible?”

Craig Cody:

Correct. That should be a team member.

Drew McLellan:

Right. If somebody is looking, so if somebody is listening to this, and they’re saying, “Oh, my God, I have a tax preparer.” One of the ways that I found you is that many, many years ago, I realized I had a tax preparer and I found the certification that you and some of your colleagues have done, which is really about, “How do I be a good tax strategist for entrepreneurs?” Refresh my memory, what’s the name of that certification that you’ve got?

Craig Cody:

It’s tax coach or certified tax coach.

Drew McLellan:

Right. So, that was how I met my tax guy, who introduced me to you, right?

Craig Cody:

Yes.

Drew McLellan:

So, what is the website for someone to go to find someone who has the kind of training that you have, which is really about helping entrepreneurs legally maximize the way that they manage their taxes, so that they can mitigate as much of their tax liability as possible?

Craig Cody:

So, it would be certifiedtaxcoach.com.

Drew McLellan:

Okay. And they can punch in their zip code.

Craig Cody:

Zip code, and it will give you all the people in your radius.

Drew McLellan:

Yeah, yeah. But I also understand that most of you like for you for example, you don’t only work with people on the East Coast, right?

Craig Cody:

I have clients all over as far away as Walla Walla, Washington. So, internet’s a wonderful thing. Skype and Zoom are wonderful things. It actually makes it more efficient for people, but there are people that want to have that sit down right in their office and you could go on there and you could find people. Different parts of the country happened to be there might be a lot more people in California that do this versus you come to New York and you’re like there might be three people.

Drew McLellan:

Right, right, right. So if somebody has found one of those folks or they want to talk to you, what kind of questions, how do I… because to me, it starts with you having the knowledge, but it’s also a little like dating, right?

Craig Cody:

Yes.

Drew McLellan:

There’s got to be a match. So, how does someone determine if someone is a good fit for them?

Craig Cody:

Well, I’ll tell you the process that we use, and it kind of makes sure that everybody’s a good fit. So, the first thing we do is we have a conversation. And it’s, “Tell me about your business. Tell me what’s going on. Okay. Tell me what pain you happen to be in and if you are in pain?” And typically, if somebody is reaching out, they’re in some kind of pain.

And then the next part of the process would be, “Okay, yeah, well, I think we can help you.” They may not like us or they will us, but the next step is, “Okay, we’ll send you a secure file. Send us your last year’s tax returns, okay, and a copy of your P&L.” And we’ll do an analysis, and then we’ll have another Zoom call.

So, at that point, if they don’t like us, they’re not going to send us anything. If we don’t like them or we don’t think we can help them, there’s no reason to go further. We’ll then do the analysis, we’ll set a call up. We’ll go through the analysis and say, “This is what we think we can save you. Do you want to move forward?” And then that’s the point where we start to work on the plan.

Drew McLellan:

Okay. But part of it is, that’s sort of the math part of it. Right?

Craig Cody:

Yes.

Drew McLellan:

But part of it is the, “I’m talking to you about my money,” and there’s a trust factor there, right?

Craig Cody:

Yes.

Drew McLellan:

So, how does somebody get to that level of, “Boy, this person is a good fit for me?”

Craig Cody:

I personally think it’s the conversation you have with that person. You’re either going to feel, “Okay, I trust this person. He’s a CPA or he’s an enrolled agent, so I’m okay. I don’t see stuff on the internet saying, ‘Run,’ when I hear his name.” And then you just have to whether you’re ready to make that decision to move forward, you move forward. But I think when you have a short conversation with somebody, you could kind of feel them out and you’ll get that spidey sense, whether it’s a good match or it’s not a good match.

Drew McLellan:

Yeah, yeah. I think trusting your instincts is probably a good thing. What checks and balances should my tax strategist or my CPA have in terms of protecting my data? We’re all, we’re hearing all this stuff about data, [crosstalk 00:44:53] and all of that. So, what should I expect someone like you will have in terms of especially I’m in Walla Walla, Washington, you’re in New York, so I’m transmitting stuff back and forth to you. What is safe enough?

Craig Cody:

So, yeah, what is safe enough? So, there are rules as CPAs we have to follow and the IRS has guidelines. So, nothing should be sent that’s not password protected to start with. We’d like to use ShareFile for sending documents back and forth. That doesn’t mean that clients are always going to follow that. They’re going to send us documents. They’re going to email it to us and stuff like that. And then making sure that you have the proper safeguards, just like you guys have to make sure you’re not hacked.

And I’ve heard enough horror stories, cyber. I’ll plug cyber liability insurance to this. I’ve heard those horror stories, and I’ve seen the bill, so. But I think transmitting information back and forth should always be done securely. At the very least, password protected and don’t email the password.

Drew McLellan:

Right, right. Yeah, some basics. So, this has been a great conversation, Craig. Thank you for sharing your expertise. And we covered a lot of ground. We covered fraud and tax strategy and all kinds of things, so this has been an hour packed with information, so thank you for your time. I appreciate it.

Craig Cody:

Well, thank you very much for having me. I appreciate it.

Drew McLellan:

If folks want to track you down, if they are looking for a new tax strategist, and now that they know that you work with people all over the country, what is the best way for them to find you and to set up that introductory conversation?

Craig Cody:

So, they could go to our website, which is craigcodyandcompany.com. And if they go to /buildabetteragency, we’re going to offer them a free copy of our recent updated book or they can call us, 516-869-4051, or they can just email. A lot of people just email us and that’s [email protected]

Drew McLellan:

Okay. Awesome. Thank you very much for sharing your expertise and for your time today. I appreciate it.

Craig Cody:

Thank you. Have a good day.

Drew McLellan:

You bet.

Hey, guys, this wraps up another episode of Build a Better Agency. I am a firm believer that while it’s important that you make a lot of money, it’s even more important that you keep a lot of the money that you make. And I think Craig gave you some really tangible practical solutions on how to do that. And if you are in the description, if you heard me talking and you’re like, “Oh, my God, I have a tax preparer” or if you’re outside of the US, and you’re thinking, “Oh, my God, I don’t have these fail safes in place, in terms of protecting myself against fraud,” do not mess around with this stuff. Do not lose a penny to either fraud or paying taxes that you don’t need to pay. Make sure that you engage with a professional who can help you sort this stuff out.

And I will tell you that people like Craig can not only help you with your tax strategy, but they can also help you put in checks and balances around fraud to make sure that you’re protected from that. So, Craig made the point that a lot of people look at a tax strategist or their accountant or their CPA as an expense and I will tell you from personal experience, that that is some of the smartest money that I ever spent because when I look at my old tax bills versus my new tax bills, and I look at how safe and protected I am from a fraud point of view, it’s because I work with someone like Craig and I’ll gladly pay his bill every year, because he makes me money. And that’s what’s Craig’s point and folks like Craig will make you money, but you cannot take advantage of that if you stay in your status quo.

So reach out, either to Craig or one of his colleagues, and start the conversation. It doesn’t cost you anything to explore. And you don’t know what you don’t know until you have a conversation with someone who has the depth of expertise that Craig and his colleagues do. So, make sure that you’ve got a great tax strategist by your side and somebody who is helping you with all of your daily accounting stuff. Whether you’re in the US or outside of the US, make sure that you have surrounded yourself by that level of professional.

This wraps up another episode of Build a Better Agency. I’ll be back next week with another guest who is going to hopefully make you think a little harder and a little different about your business. In the meantime, you know how to track me down, [email protected] And if you have another spare second or two, if you could shoot over to iTunes or Google or Stitcher or wherever you get this podcast and leave a rating and review, I would be most grateful. I promise you I read everyone, but that’s how we get on other people’s radar screens and anything you can do to help us spread the word is greatly appreciated. Chat with you next week. Bye.

All right, that wraps up another episode of Build a Better Agency. I can’t tell you how much I love spending this time with you. Thanks so much for listening. Hey, speaking of thanks, another way we want to give thanks is we’ve built a new tool that I would love for you to check out. We’re coming it the Agency Health Assessment, and basically, you’re going to answer a series of questions and based on those answers, the tool is going to tell you in which aspect of your business maybe you need to spend a little extra time and attention to sort of take your agency to the next level. We’ve identified five key areas that really indicate an agency’s health and we’re going to help you figure out where you need to spend a little more time.

To get that free assessment, all you have to do is text the word “assessment” to 38470. Again, text the word “assessment” to 38470 and we will send you a link, so you can do that at your leisure. And hopefully that will give you some new insights and some direction in terms of your time and attention in the agency. In the meantime, as always, I’m around if I can be helpful, [email protected] and I will be back next week with another great guest and more things for you to ponder. Talk to you soon.

Speaker 1:

That’s all for this episode of AMI’s Build A Better Agency, brought to you by HubSpot. Be sure to visit agencymanagementinstitute.com to learn more about our workshops, online courses and other ways we serve small to midsize agencies. Don’t miss an episode as we help you build the agency you’ve always dreamed of owning.