Colorado Springs: Am I Planning for Success or Disaster? Business Start-Up and Taxes

Welcome to The Tax Answers Advisor with Marcelino Dodge, Enrolled Agent, covering what everyone talks about at the dinner table, your Federal Income Tax. On this show today, we will discuss about starting a business. Are you planning for success, or for disaster? Among the questions that we will answered during the show is the type of entity should I be. 

Now if you're considering starting a business and you know in these situation that we're in. It may be questionable to be starting a business, but there are several entrepreneurs out there who have a great idea that even under circumstances that we’re in, you can start a business, and perhaps do very well. Take a look at the markets, see what's happening. You have an idea, a lot of ideas have come out of that successful businesses have come out of situations, bad situations like this and people turn them into a successful business.

 So, you have an idea, you want to start a new business. Well, who do you go to talk to if you want to start a new business? If you want to start a new business, you have an idea. While many people what I have found is they will go and talk to their banker. They’ll possibly go talk to a lawyer. But yet, they often times do not go visit their Accountant or person that does their taxes, which, at least in my opinion, as a professional. If you’re thinking of starting a business. That is the first person you should go speak to, about starting a business.

And there's a number of reasons why that I feel this way, and the biggest reason I feel is because of the potential tax situation or tax areas that you need to be aware of even in creating a business and that's vital to know before you go actually talk to the Attorney or you go talk to a Banker. So, the tax professional like me is a good person to start with, because as a tax professional. One who deals with the numbers and businesses all the time. We can have a discovery session.

To really look at your business idea very closely and see, is a good idea? How we can validate this idea? Is this a program that I want to move forward? Am I making the right choice in looking to start this business? That's some of the areas we can look at with you and helping you to establish goals. Start off with perhaps a model skills. Where do you want to accomplish in the first few months of the business? What do you want to accomplish maybe in six months, in a year and so on?

So to establish those goals helps you to know where your business is going to go or at least give you a direction. And then a success plan would be essential. How am I going to reach this goals now? How to identify the elements of success in the type of business. Now, especially in the type of business whatever type of business you’re looking to start. Hopefully, it’s something that you already know well like, for example, if you been in tree trimming for somebody, and you want to go out and start your own tree trimming business.

Obviously you have the background, you have the training to do that so that's something you can possibly do and do well. And I know some people who go and do this business well because they had the training. Yet even in knowing how to do the actual tree trimming itself with this essential to the business. But then when you go out to start your business and there’s the back and information that is this vital for you be able to do and that's why it's important to talk to myself like a tax professional so that you can have that information ready to go.

Now, once you get your discovery session, get some ideas going, where gonna go? You're going to do and then work on setting up a business plan. Find out these are the steps that I need to take for success. A good question then to consider is what type of entity is my business going to be? Well, we're gonna discuss a little bit each of these a little bit more but one thing I’m going to say here initially is the fact that it's like the beginning suggestion. Everybody says to go and make is go, be an LLC.

That's like what many banks say, many Attorneys say, just go for you in LLC and start your business. Well, from a legal standpoint, I'm not giving any legal advice or anything that, that could be a good idea. But without fully understanding the tax consequences or the tax realities just by going and doing that. We don't know if it's a good idea or not, from a tax standpoint. So from tax standpoint, it's important to know what kind of structure you're going to do because what's going to give me the most protection, to give you the most benefits, and until you have goals established.

We don’t know what entity is going to be the best. So it can range anywhere of what kind of business is going to be best for you or business system is going to be best for you. Is going to be based on your goals, what's going to be better for you to start off with? Is being a sole proprietor perhaps good for you or maybe some type of LLC. If there's more than one person involved, if you have two or more people, should we do it as a Partnership? Some type of Corporation?

That’s when you bring everybody together and really sit down and establish some goals that will help you to be able to start your business and make the correct decisions from the beginning, by having those goals established. Now when it comes to establishing a company, there's entity information which, like if a corporation or an LLC or some type of entity is needed. Like that it's important to get not just rely on me as perhaps the Accountant or Tax Professional but you may need an Attorney.

To help you in setting up those legal situations with your State because a Secretary of State's in each state usually has some type of filing that you need to do and there's articles of incorporation for corporations and there’s other documents required for an LLC. Usually I recommend that you work with an Attorney because they’re though, that is the practice of law. That’s what I recommend. And so that’s why I recommend do that part and so we can now work together with an attorney because in that area.

And as far as there's tax registrations, we can help ones to obtain depending on your state, through your State Department Revenue. Those matters can be handled and of course the IRS numbers, if you’re starting an entity or an LLC usually you need some type of Federal Employer ID number to go with those.

And certainly we work with helping ones attain that. Then of course once you have the federal license number and you have other information required by whatever is required by your particular state.

Because forming an entity is also basically done at the state level. Then you’re going to open up your bank accounts, and then there's so many other areas that we go into help ones to do when you start a business. That is important to cover each of these steps very importantly. Then once you get the business going or once you get through the setup process. Then you also have various accounting.

You have payment system that you need to set up which is what we work to help ones to set up, and these are vital to set up good from the start. Because what happens a lot of times with ones, I’ll go and start a business and I’ll go sign up for some software online, or maybe go to a store and buy it right off the shelf and of course most of its online through subscriptions now. Is that I’ll go and buy the software and we’re in the follow the steps through software to set it up.

But yet getting that set up correctly from the beginning is just absolutely vital. So what we need to keep in mind is that just because software says it's, “Do it yourself and it helps you to run your business”. It's not as easy as it looks because I've seen a lot of reports come in from various software's that, basically, it wasn't set up correctly. And the people, that individuals that set up their business you know they do a great job.

People do a good job with what they do and they make their best effort in fixing up the software, but yet it’s really at least I really recommend having a professional of some sort, like myself, help you to set up that software, and then help the user professional, which what I can do is help you to not only set it up, we can help monitor it, so that your profits are monitored on a daily basis. So we can see okay this is what, this is the money coming in, this is money going out.

This is who we owe this week, this is who we need to pay, and so on. On that way you know you have a profit and loss going, and it's accurate. Oftentimes, you also need in the business, not just the profit and loss statement. You need to balance sheet which is needed for your banks. And because oftentimes ones have difficulty setting up their software initially, there’s various numbers in there that are off. And because most people, they do a great job but they don't necessarily understand how an accounting program works.

And that's, this kind of what it is. It's not good or bad, it’s just what I encountered in the business. And so because of that, it's good to have someone help you set up these processes and then help to monitor this processes, this is that way. As I mentioned in the title for the show, “Planning for success or disaster?” You avoid the disaster part of that, by having your accounting system set up very, very correctly, from the beginning of your business.

And so what we're going to do in the next segment here, we're going to go ahead and discuss more individual entity types, and advantages, disadvantages, tax consequences of each. And why again it's so important to decide ahead of time, what kind of entity am I going to be when I start my business. That way, you maximize the potential for your success, maximize potential for your profits in putting together a plan, setting some goals.

Now as a step back now, is from some information you can already considered now that we've established the goals and an action plan. We need to discuss the type of entity for your business to be, perhaps, for your business or starting it may be starting out, it may be best to be a sole proprietorship. Now, also if you’re an individual to all just starting a business. And is you can also be a single person LLC which most people just don't understand or don’t initially know that when you do a single person LLC, by definition, or by default with the IRS that entity is still taxed as a sole proprietorship from the IRS standpoint, which basically means you file an Schedule C. Now, so we're gonna interchange those here a sole proprietorship and single personnel LLC because they are taxed the same which basically from the IRS standpoint that is the individual or that is the person. Now oftentimes when I deal with people who worked and sole proprietorships, or single person LLCs a business.

Usually happens but, usually on a sole proprietorship, and that is the fact that personal funds and business funds are often co-mingled, which means that people sometimes will use their business checking account to pay personal bills with which on a sole proprietorship essentially because it's all the same, it's not really that big of an issue now. But what it does creates though, it creates a little challenge or actually a big challenge in trying to determine how much profit is the business or sole proprietorship making.

Which is why I often tell people, even on a sole proprietorship or single person LLC, it is absolutely essential that, 1. You have a separate bank account for that business. And you treat that account as a business account. Not as your personal savings account, not as personal checking account. Now you can take draws out of that account like an owner’s draw is which is something I do recommend and some, some of my clients do that.

They'll take like $500 or $1,000 a week transfer that from that account over their business account because that’s like a draw of a sole proprietorship, which essentially that's okay and that makes that easy for accounting purposes, for tax purposes and everything. That way, you can easily keep that part separated, and then have everything else that's in that account as a business expense. So that it’s once again easy to track and in a sole proprietorship or single personnel LLC.

The owner or sole proprietor or the member manager of that single personnel LLC. They are not allowed to be an employee. That is one of the biggest mistakes I have seen with these types of businesses, is that somebody set them up and let that owner be a schedule an employee of the business and when you're the owner of that IRS regulations say in a sole proprietorship, no you’re not an employee of the business. You are the business essentially. So you can have employees and sole proprietorships.

I do several of them, I work with them, and it's deducted as wages on the tax return for the sole proprietorship, but the owner is not. Now we keep in mind that once the tax return is started or the schedule C which is what it is on the tax return we go through to complete that. We keep accurate books through the year for the business to help them to know their profit and losses as well as to help the owner to appreciate that they may need to pay quarterly taxes.

And some do need to do that based on what their profit and loss says that each quarter, which is usually April 15th, June 15th, September 15^th and then January 15^th of the following year. So they pay those quarterly taxes because the employers as while the sole proprietor pay self-employment tax, which that is both some of what an employee would normally pay and then an employer would normally match, which is one amount that the owner pays.

Now that actual amount they pay, or the net profit because that's what they pay it on is the net profit of the business after expenses. May or may not close to what they took and draws but the draws don’t necessarily take into account expenses that are often calculated at a later date, such as depreciation for large equipment or other items in the business. Sometimes interest like, they’ve got a business loan isn’t calculated right away it just, it's just very careful. It’s something that a person may need to do.

I’m doing oftentimes that’s where many businesses started as a sole proprietorship or single personnel LLC and that may be what they say and that could end up working good for the person operating the business. I mean I know several people here and I help several people have been sole proprietor for years and it’s worked for them. They’ve get their taxes paid and they operate and they're successful. Could be good for each individual.

We can't say one size fits all, but each individual may be. He’s being a sole proprietorship is the right choice. Now, as we’re going and we talk to individuals wells and establish their goals. Maybe in some cases, a Corporation. That would be either C Corporation or an S Corporation that they may want to estate. Now depending on what they're going to do what their goals are. How many people are coming together to form this business. Maybe they’ll want to form a C Corporation, or an S Corporation.

Many people in small business and in the areas that I worked with, are maybe one or two owners that start up like a CCorporation for example, which is as we look at C Corporation initially. That's an entity of course all to itself. The C corporation pays its own tax. But one of the disadvantages of the C Corporation is that it's also known for double taxation. And see there can be single shareholders or can be multiple shareholders in a C Corporation but nothing flows through to them. It's all paid at the corporate level.

Now, the profits that are made for the year that the C Corp can pay taxes on are can be distributed to the shareholders in the form of dividends. And then see this is where the double taxation comes in is that the C Corp paid which the flat rate for C Corporations is 21% under current law. And that's always basis show on is what current Law, lock is at the time that the show is being done. So they could pay the tax on those profits 21% at the corporate level.

Then they distribute out those to as share as dividends to the shareholders. Then, the shareholders pay tax on those dividends. That's where the double taxation comes in. Oftentimes, we see these are small corporations in their small privately owned corporations which somehow I work with. There's an owner and oftentimes that owner which can be a single shareholder or maybe two or three shareholders of that C Corporation.

They're oftentimes employees of the corporation. Which is allowed because you have a separate entity there, that the employer, which the employee which the owner is an employee of the business. And the nice part about being a C Corp is that there’s many tax benefits that the corporation can pay for the owner. Like, it can buy the owner’s, the Corporate to health insurance for the individual shareholder. Of course there's retirement. You can have retirement plans within the corporation as well.

All of these are subject of other expenses which reduce to Corporation Operation profits. It’s the amount of tax that they pay. And so they’re saying, there's several other areas that are many benefits that a sequel can have. But they just have that one little deal of a double taxation there, but it allows you to people doing. I have some clients, is you can turn around and do very successfully, do very legitimately and very legally, is you can have a building for example that you own as an individual.

And then you can take that building, and at whatever market value is for the area that you're in, you can then turn around and lease that building to your Corporation. But it's vital for that to come across as legitimate as that you have an actual lease agreement that has minutes from a corporate meeting that shows that you’re entering into this agreement between my company ink and me that we're going to deal with this amount per month basis.

And it needs to be at market value of now as a shareholder, that's getting that rent that’s running into your business. It's really nice that you have income coming into you from business that you don't pay Social Security tax on, Medicare tax on. You do pay income tax on it. But yet, you also still get deductions, you get deductions like property tax, you get deduction sections like depreciation on the building, and other items that you perhaps you're paying that the corporations is not paying on the building.

That's one of the many advantages of being a C Corp, that can really be very advantageous for you having a C corporation. Now of course we touched a little bit before on the S Corp, which is the other option that you have and it comes to Corporations, is that S Corp which is actually very, very common. Many people I worked with and some entities. You can make an election to be taxed as a Corporation as an S Corp. See it's when you go to form a Corporation at the state level.

Then you go, as at the state level it's corporations, it's all the state is a Corporation. Now when you make these elections to be an S Corp, that's actually with the IRS because you go and you get your EIN number or your employer or your ID number with the IR address. Basically, you tell the IRS, I’m going to have employees, and I'm going to be a Corporation. Well by default, you're going to be classified as a C corporation with the IRS.

Unless you file, it’s a form two, five, five, three, signed by all of the shareholders of the Corporation. Then, you can elect with that. Would you like to be an S Corporation? Now usually I recommend if you're going to be an S Corporation, you do it from like when you initially become a Corporation, from the very beginning. If you have been a C Corporation for several years, and then you want to change to be in taxed as an S Corporation, you can make the election and do it. And that's certainly possible.

I’ve had C Corps go ahead and do that. There could be some tax ramifications down the road if they’re certain profits that you still have and so on. Or perhaps depreciation, that could be depreciation issues or a capital gains issues down the road of certain property is sold. But all that’s just stuff that needs to be disclosed if you decide to make it go from C Corp to an S Corp. That's why it is recommended starting and being a new business, we got to make a good shot from the beginning.

What type of corporation are we going to be? Are we going to be a C Corp, or are we going to be an S Corp?  

A couple of points that I wanted to mention here which is really a wonderful, one of the wonderful basis of the Tax Cuts and Jobs Act passed near the end of 2017, is that you have a Corporate operation or business that is making under $26 million an average sales in a year. You can use the cash method of accounting. That is a true, wonderful revision of that law for a businesses to be able to use the cash method of accounting.

 To do that, that's basically, at least I think it's a much easier method that a curl, so it’s my opinion. I think most businesses take advantage of that. Well you can make an automatic recommendation for. Now, one of the disadvantages of a C Corp that I want to touch on that I had that much experience variance with, is that you have many C Corp especially ones that are smaller ones that may have just a few million dollar sales a year. They may make a lot of contributions and donations to charities, and those are great.

That’s wonderful that they do that to nonprofits and so on, that would be deductible. However, because of limitations within the law, all C Corps can actually deduct about 10% of whatever their profits are. So it's usually pretty limited on what a C Corp can actually take and for most average Americans, people who are running a business. That's one of the advantages that an S Corp has over a C Corp, is that if you make significant donations as a corporation, because the S Corp is a flow entity which means a majority of the time, there's no tax paid at the corporation level.

It's paid at the owner’s level, is that those donations to the nonprofits charitable donations actually go down to the shareholders. And the shareholders can use those and with the higher limits on exempt on. To be able to itemize as a shareholder. Those could possibly put you over, depending on what the S Corp is actually doing. Now back on the S Corp a little bit more, the single shareholder or multiple shareholders on S Corps. As I mentioned it’s the floor through entity.

Now, each shareholder owns a percentage. So if you have two individuals operating as S Corp. It and they would through a 50% of the profits or the losses directly to them. Which is one of the big advantages which can be an advantage or measure disadvantages depends on your situation with an S Corp, but also with the S Corp again just as the C Corp, your shareholders can also be employees of the S Corporation.

Which is a big advantage because unlike the sole proprietor where you're paying self-employment tax, and having to pay a Social Security, Medicare tax benefit that is not deductible in any way. By having an S Corp or a C Corp, you’re getting those deductions fully. You’re paying that Social Security, Medicare tax payers what the Corporation pays to you and that’s withheld. And then submitted and also whatever the matching amount is on the S Corp is also fully deductible to the S Corp.

Now you also with the S Corp, as far as the employers, as far as benefits, you still get some advantages and benefits. It's just some of the differences you got to have some clear outlines on the plan whatever type of benefits you’re going to do. You can still do items like, simple IRAs, you can do those with matching 401 case with matching and so on. Now, the challenge comes in as like with, health insurance, though, is that you can have your entity pay for a health insurance.

But due to the way the rules are written is that whatever the corporation, or the S Corp in this case pays in health insurance has to be added to the income of the shareholder. But within the shareholder, gets to take that off as a self-employed, health insurance deduction. Basically it's a wash, as far as from a standpoint but still it's this kind of interesting how that rule works. Plus, you can have what's called a section 1-0-5 plan.

And also within your S Corp have medical or dental refurbishment in there, that you can for the employees as well as a shareholder. And you can do it in the C Corp as well. It just I once again on the S Corps, those amounts come back as income for the shareholder level. So there's a few differences between S Corp and C Corp that you got to keep in mind and be just aware of. But one could be more advantageous or the other depending on your particular situation and your goals.

Now the other area we want to touch on if you're dealing especially with two or more individuals, because an S Corp can be just an individual and have one individual shareholder in each for both the S Corp and C Corp. Now, if you're talking about multiple person then you got two or more people wanting to go into business together. Well, and maybe if they decide well I don't want to do all the paperwork that a corporation requires which there’s minutes, there's articles of incorporation, and other documents that are required by the state, which is why I recommend if you’re going to do Corporation.

You have some type of Legal Counsel help you do with that. In addition, that we can worked together with as the tax person as the account and helping you to form the business. The same would be true if you’re doing a LLC or a partnership, still needs to be legal agreements in there. Whether you are forming an LLC, multiple personnel LLC and all or a partnership. Now then, what kind of partnership, am I going to form?

Am I going to be general partnership, a limited partnership, which that’s all looking at liabilities, and certainly some people need to look at those things very carefully. And once again to decide what type of partnership if that's just throughout they want to go. We keep in mind that, on a partnership type of business. All the profits and losses once again, it's a flow through entity, it’s not paid at the business level, it's paid on the partners level.

Now, with this though we keep in mind that partners get fairs profit that comes through because of the strict tax structure of a multi person LLC or partnership. The partners will then pay, self-employment tax on whatever those profits are. Also, when it comes to multi member LLC, and the partnership. If you're one of the members of the LLC, or one of the partners, you’re not allowed by current law to be an employee of the business.

You don't get compensated via W-2 form, you can work for the business and it's usually written into the partnership agreement that, that person A is going to get X amount of dollars for their work to the part for their work that they do for the partnership and those are in turn during considered guaranteed payments that you receive. Now depending on also what a person like contributes to the business.

Now you can contribute money, you can contribute may be property, or equipment, whatever those amounts are. That gives you what's known as a basis in your partnership or your LLC, and these basis. You also have basis in your Corporations as well. I neglected to mention those earlier but you do make contributions of cash to a Corporation, and that helps to establish your basis whether you're in C Corp or in S Corp.

Back on the partnerships, and then as you have the basis a person or a general partner may take a distribution of cash that reduces what their basis, or how much they have invested into the business that reduces that for them. So, that's where you got to be very careful with that. And once again, profits that come up of that business as a partnership, or multi-personnel LLC. The partners or the LLC members pay self-employment tax on those profits.

That's one of the main disadvantages of a partnership as well as various legal ramifications that can come in there but from a tax standpoint, there's a lot of risk. You can end up paying self-employment tax once again that's where if that's a route someone decides to go and that's when could be what we established, once you go through the goals. Put together a plan and we figure entity. We discuss the advantages, disadvantages of this particular entity type. We come to the conclusion, okay well in partnership is the way.

It’s the way we’re gonna go understanding these matters about, okay, you're not gonna be an employee business. Youre gonna be paying self-employment tax on the profits and that. But we’re going to have employees, you’re going to be there, just going through those areas. Trying to figure that out. Now one of the areas that many people just don’t fully understand once again is just the fact because it’s like the in thing to go inform LLC.

Which if person wasn’t going to form a Corporation or didn’t want to go through the headaches of having a corporation because there’s many, there’s a lot of paperwork with the corporation. A multi-personnel LLC is a good option but the drawback to the multiple personnel LLC is based on current IRS rules. The multi person LLC is taxed as a partnership. So which basically leads you back to the partnership rules and regulations for the LLC members of what they need to be doing or how they’re going to be conducting business.

Usually when I come to see what I’m dealing with an LLC and I don’t know why more don’t recommend this, but when I worked with multi-personnel LLCs usually for simplicity purposes and makes it easier on the LLC members which is a beautiful election in the tax code. A multi-personnel can elect, the stay as an LLC at state level but for federal purposes they can make an election to be taxed as an S Corporation and what is the significance of them being taxed as an S Corporation. A tax standpoint that makes it easy for them to really get by with not having to pay a self-employment tax from the profits from the business. It allows them to be employees of the business so that their amounts that they would normally pay in self-employment tax, once again their Social Security Medicare. It allows them to get a W-2 form as an LLC member because they’re being taxed not as a partnership which is what a multi-person LLCs are taxed by default.

You get some license, be taxed as an S Corp so that the LLC members are allowed to be employees of the business which I have found when I have this discussion with my employers. They find it to be a very appealing deal especially if they’ve been in the sole proprietorship and accounting together to form this LLC business or LLC and they come to find we can do that? You know that’s great, we’d rather be like an employee and that’s because we’ve been paying this self-employment tax for all those years, having this big tax bill at the end of the year.

We don’t want that anymore and so this solution I offer to them and with this multi-person LLCs be intact as an S Corporation. It works out great for them  into some of the benefits and talking about having an escort, where they can have like retirement plan and so on. Having things more back and forth that you can get into with big partnership. So whenever I can in setting up their books and they have because they keep their money separate and they’re able to have benefits of being an employee of their business.

Which once again goes into some of the benefits I talked having an S Corp where they can have retirement plan and so on with and without having the things going back and forth that you can run into with being a partnership. So whenever I can, I usually don't recommend partnerships to people we can avoid it. Usually a multi person LLC could be a better option but this depends on circumstances.

But if we’re gonna do multi-personnel LLC, I usually recommend, let’s be taxed as an S Corp so you can take advantage of the benefits under S Corp Law into the having to pay self-employment tax and have all of the other issues that arise with being taxed as partnership. 

In starting a business just to touch real quick here, it's important to speak to your accounting or tax professional. I recommend actually speaking to them first.

Because we can help you to establish goals, help you put together a plan, and the most importantly, help you to understand whether initially, you should be a sole proprietor or single person LLC. And understand the tax ramifications of being this is understanding you may need to pay self-employment tax on your profits. Also, the fact as a sole proprietor, you can co-mingle funds even though we don't recommend it. I don't recommend it. I still recommend you treat your sole proprietorship business as like an entity like a corporation that way you can track your profits and losses much better and have a separate bank account.

We talked about the advantages of a being a corporation, such as an S Corp or C Corporation. Now, with these type of entities, it’s vitally important, absolutely essential that if you go through this route that the checking account with these Corporation, whatever you choose to be is truly a separate account of course and it’s in the tax ID number of the business. And it's treated. Everything is treated as business related money for the business.

That way if you've done all your other legal protections and had all the consultations with the Attorney regarding set up of these that you don't break that Corporate veil, as well as for IRS Audit purposes if for reason that happened. You can show distinctly to me this has not been my personal checking account, look at this, I got all my business expenses right here. This is business income coming in, business income going out. My paychecks, look this, I have a separate account, this is where I’ve been getting my money from my account so it's all here.

So it's all good and nice and clean, which is what we really like to see. And so, with good plan as well as come to see the importance if you decide to be a multi-personnel LLC or a partnership, a little bit of difference is there with one of those being could be because you're one of those how if you’re one of the entities, the multi-personnel LLC or partnership that you do pay self-employment tax on those.

And so it's important to consider very carefully what you're going to do in those matters as well so that you make a good choice and so planning is essential from the very beginning. What I do see happen oftentimes, businesses because they’re often starting out small, is that they often start off because it’s easiest to do it makes sense. They may start off as a sole proprietor, because they don't have big, big plans but maybe not a lot of money but you want to get going.

So we started the sole proprietors, we helped to build the business up. And then at some point down the road they got a good business going, you know maybe we need to turn into, especially if it’s a single owner, maybe be a single or single shareholder in a corporation and then decide, I want to be a C Corp. Or all the taxes are paid at the corporate level or do I want to be an S Corp where some losses flow through to me any individually, and I pay tax on the profits after they flow through to me.

Certainly, those can be very advantageous now of course, going from the Sole Proprietorship, to a Corporation, which is what many people can do. The advantage of course then you can be an employee of the business, which to me that is just absolutely essential, because if you're having good profits in your business, you want to reduce your self-employment tax and start taking advantage of having items such as your salary.

Also, such as your contributions to retirement plans, business matching to retirement plans all of that becomes deductible to the business. And I stress also here the importance. Also if you want to be an LLC, a multi-personnel LLC in particular. I really strongly recommend with your consultations that if it's practical and it’s in with your goals being a multi-personnel LLC that's taxed as an S Corporation can be a big advantage for you and could work very well for us you.

After we established some goals that may be the best way to go. But once again, no matter what entity we talked about here. None of these entities is a one size fits all, each individual's circumstances, each individual goals, each individual's business. We have to consider all those items. We have to consider the plan. What do you want to accomplish with your business? And then and only then can a recommendation be made as to what type of business entity, you are going to be?

Don’t let anyone just tell you, all you need to run out set up an LLC. Talk to your Accountant or Tax Person first. They’re the one’s I can best advice you from a tax standpoint, which entity would be best for you. That is what I certainly suggest for you to be doing. Now, I’m going to mention that if you decide or if you'd like me to cover on The Tax Answers Advisor from a tax standpoint, tax planning stand point, you can email me at success@cashtracksfinancial.com.

I certainly do appreciate all you listening today, next week we're going to consider, “How safe is my tax information?”. A vital topic when you consider how many different tax preparers are out there and if you’re using what's known as a “ghost preparer”.

Colorado Springs: Welcome to The Tax Answers Advisor Podcast!

Welcome to the very first Tax Answers Advisor, I’m Marcelino Dodge. The show today is covering what everyone just loves to talk about their federal income tax. And I do mean that in jest, because that is not the favorite topic everybody likes to talk about. But on this premiere show, we're gonna help you learn more about what this show is going to be about. And what we'll discuss, as well as how saving on income taxes is actually possible. When you use the correct information.

One of the many challenges I've seen in my years of experience in doing income taxes, and in meeting with my clients is that oftentimes, because of the way the tax code is written, and even how oftentimes some tax people explain many terminology, and such as it's just difficult for many people, and meant just simply to understand what is happening on their tax return. And so what I'm working to do today, and as I go through this show, is to help ones to understand it better by putting it in basically, everyday language, because how we talk is the best way for us to be able to understand what is happening with our tax return, not just okay, this item on line seven is this and this item is line eight.

But what does that mean? And I see that look on my clients faces many times as to what is that? Was I what that is? Well, yes, that's what that is, well, why did my tax person not explain that to me, all I can do is turn around and give them back a blank stare, saying, I don't know why that wasn't explained to you. So that's my goal is to try to help ones to better understand what is actually occurring on their tax return.

Also, what I encounter a lot in my business, and a part of the purpose of this show, is to dispel common myths that exist when it comes to income tax, in particular, federal income tax. One of the most common myths that I encounter and even many people here is that the rich people do not pay their fair share of taxes. That is really a tax myth. And why is that? Well, when we look at actual figures from the Internal Revenue Service, the IRS which can be our friend can be our enemy just as easy.

What we can certainly appreciate when we look at this, though, think about this, people who make more than $500,000 a year make up 1% of taxpayers consider that. But they pay and this is according to 2017 figures, they paid just over 38% of the federal income tax that was collected. So is that fair? 1% of the population pays 38% of the taxes. That's fact as of 2017. Now, not to go too many figures here, but just a couple more, if they're in the top 10% of taxpayers, which are basically those who make more than $140,000 a year they paid 70% of the taxes, federal income taxes collected.

So once again, you got 10% of the population paying 10% or sorry, paying 70% of the taxes, federal income taxes collected. Is that fair? Now, here's this and I know this figure is absolutely true based on my own practice in doing income taxes, the bottom 50% or 50% of taxpayers or just under 50% of taxpayers pay 3% just a little bit over 3% of the federal income tax that is collected. So once again, is that fair? That just under 50% of the taxpayers pay only 3% of the federal income tax.

You got to decide that yourself based on what the IRS his own numbers are. And I know this is true because many of the people that I do taxes for who make who would fall like under 100,000 or even around 150,000 in a year, pay no federal income tax. So yes, I do know there's are many, many taxpayers who pay no federal income tax. So basically, the myth about the rich not paying their fair share is a myth, they pay the vast majority of income taxes that are collected.

Another common myth that I encounter in my tax business has to do with people who get married in the latter part of the year. They think many people think, and it is very common that well, I got married in December or November of the year, I was single most of the year. So I should be able to file a single or if I have children, I should be able to file this head of household. Well, according to IRS tax code, this is also a myth that is commonly propagated, and some people have filed their tax returns just simply wrong.

And with that, because it is wrong is because the federal tax code states that if you get married basically on December 31, you are considered married for the entire year. So it doesn't matter when you got married during the year, whatever your status is, at the end of the year. That is what your tax filing status is, which means you either are filing, married, filing jointly, or married filing separately, there'll be some other specific items, I'll get into another shows about tax filing statuses.

But that is one, once again, if you are married, at the end of the year, you are considered married, even if you're married 306. If you were single, 364 days, you're considered married for the whole year, you got married on a 365th day of the year. So just another myth to keep in mind. Now many times people come in and ask or I get many phone calls. This is a myth too, that I get this immediate tax deduction. Because I bought a house. Well, there, the possibilities are there. But under current tax code law, there is no credit for buying a house. Now there can be maybe some energy credits that you may qualify for.

But that's a whole another discussion. But yet, you also may get a deduction for your interest on your home, depending on how much that is and other deductions that are still limited on the itemized deductions. But yet, it doesn't give you an immediate credit and improvements on a home Don't give you a tax deduction either. Because many times with those improvements, they just add to the basis of the home, but they don't give an immediate deduction. And once again, can get in those more details another show.

And another common one I hear coming in is people come in and say, Well, this place over here told me I'm getting X amount or $2,000 per child on my tax return. Well, there's a whole lot of information that goes along with that and a whole another discussion. But you do get a child tax credit, which is $2,000 per child now that is there. But yet what most people don't realize that's a nonrefundable credit, which basically means it only goes against tax.

Now there is a refundable portion of that, which I'll get into more detail later. But yet that that's a greatly reduced amount, and certainly more understanding. And sometimes you need to actually be looking at the form to better understand that. What we need to keep in mind, too, is understanding another understanding I want to create with this show has to do with Tax Cuts and JOBS Act. There's so much misinformation out there about that, like the biggest one here is that it only benefited the rich.

Well, I can tell you from my tax practice, and from my tax season since that was filed in both filing 2018 and 2019 tax returns that did benefit many, many people who made $100,000 a year last even $150,000 a year or less. How does it do that? Well, it did that because one of my previously just mentioned was a $2,000 child tax credit, which previously was only $1,000. So that doubled right there. So that benefited a bunch of people already. Also the tax rate dropped.

I don't know how many clients I did, who their tax amount that they actually owed at the end of the year was less into for 2018 than it was for 2017. And when I explain that to the taxpayers, they were like, well, that makes sense. Thank you for explaining that to me. And then the last thing I want to mention here before the break is most people rely on some type of software in doing their tax return. Well, sometimes say, well, the tax software company should know.

But one thing I do know, in doing using professional level tax software is that you still need to understand the loss nor the tax software is doing because the calculations which tax software is great for that. However, it doesn't always put it in the exact place where it needs to go. So he just can't rely on software to do it, maybe on some very simple returns, it could work. But in general, tax software, you need a little bit, you need some good knowledge to be able to put it into the right place, especially when you start dealing with small business, rental houses, and other challenges and other things that can make a tax return much more complicated.

So we want to keep these purpose in mind. And these are some of the points that we're going to cover in more details in the show as we go along over the next few weeks. Now, as I mentioned earlier, my name is Marcelino Dodge and who am I to be doing a show like this? Well, one area is I'm a tax professional with 20 plus years experience in the tax business. Also, I am an enrolled agent with the Internal Revenue Service, which basically what that means is that I am licensed to represent taxpayers before the Internal Revenue Service also indicates that I take regular continuing education classes each and every year.

And I take quite a few of these, many of them just to keep up with the changes. So and it's very time consuming just to keep up with that. So what I want to keep in mind as we work as I go through this is just kind of educate a little bit more.

Earlier I neglected to mention that we're going to talk about business taxes as well in the course of this show.

So that if you have a Corporation, Partnership and LLC all of these we're going to touch on all of these at some point in some show during the course over the next few weeks. Now back to a little bit more about who I am as Marcelino Dodge and why I'm doing this show and why I am doing this show. One is the fact that I just love taxes. Frankly. I've been doing it income taxes, since the 2000 tax season.

It's been a great time I like solving problems for people, I like looking for the answer, I like looking for that tax deduction. In order to become an enrolled agent back when I took the test with the IRS initially in 2005, it's been altered since then. But at that time now, it was four tests, four different types of tests that the IRS administered at that time. And they were all written tests that you went to in this case.

I went up to Denver, and spent two days in Denver, a morning and an afternoon over two days taking these tests on various tax objects, from individual to business, to ethics to just general tax law, and so on. And they were pretty cumbersome at the time anyway, got through those and passed the background checks that the IRS does. So I had the privilege of being an enrolled agent since the spring of 2006.

And since that time, I've taken a lot of continuing education courses, I take many, many hours, probably about 40 to 50 hours a year, in education credits, just to keep up with all the changes that happen. And especially after the Tax Cuts and Jobs Act in 2017. That was a busy season going into that next tax season. So certainly, we covered a lot and we continue to do so. Now something interesting that I find with me is the fact that when it comes to most tax people that going to do taxes, that's like the first thing they do when they come out of college.

Well, frankly, for me, that is not the case. In fact, I was in other businesses for several years, after I got out of college. And after I got out of college, graduating with a bachelor's degree of no things, Radio and TV, it was a Mass Communications Major I had. But I ended up doing taxes, which is great. I've been very happy in what I do. But also in that time, actually, before I got into taxes, I was also I had also gotten into the investment business. I'm doing investment advisory work.

I'm also Life Insurance Licensed as well. So I can speak authoritatively in those subjects as well. And I'm going to work those subjects in with this business, of taxes. And with this show, because of being together of having a unique mix of the tax background, of the life insurance, and annuity background of the investment background to be able to work and see how all those will work in harmony, especially when we come in and look at things like IRAs and other plans when we look at how strategies ones can come together to help them to save money on their taxes now and even in retirement.

How you can save money, planning ahead for retirement? So indeed, these are some wonderful things to keep in mind. And as I mentioned at the outset of the show, this the main focus of this show is income taxes. Now, one thing we got to keep in mind, though, and even in the in the show, it talks about Tax Answers Advisors, the word “tax”, it's a three letter word. But I have never seen a word that has so much misunderstanding behind it. Because when you say the word tax, there is any number of actual taxes you could be talking about.

Yes, I focus in on income tax, that is my main line of business that I do. Now, there are other taxes that we pay that often people don't, don't realize that fall into that and one is sales taxes. Now, I'm not going to really get into sales taxes in this show. And the one reason is, is because of the 1000s of jurisdictions that exist in this country when it comes to sales taxes, because not only do each state has its own sales tax, all 50 states, then you got counties, then you got municipalities, all of them have their own version, or own rules in regards to sales tax and they have their own percentage rates.

So in general, we're not going to talk much about sales taxes except in the term of income tax of where their deductibility comes in. Another area that we're going to touch on a little bit, but we're not going to get too much into payroll taxes. But that's also that can also be another topic that kind of relates more to income taxes, then what actually sales taxes do what we're concerned about with payroll taxes, and we'll probably touch on a little bit then because where it falls in with income taxes is the fact that many employers over the years have tried to get out of paying their payroll taxes.

Now what is of course, Payroll Taxes? Well, that is what the employer contributes on behalf of the employee for their social security, for their Medicare. And then oftentimes, and then depending on the state, there could be unemployment taxes that they pay for, for this state. Also, there's some federal unemployment tax, which is very, very small amount compared to what you paid in most states. But the key thing to keep in mind with payroll taxes, many employers, they play a game with that.

And that's not a good game to play. And sometimes what they do, and many times they do is that they pay people as an independent contractor, so that they don't withhold taxes for the people. And also so that the person ends up paying all of their own taxes, they're own both Social Security and Medicare taxes. Now, that is a very dangerous game, see, where most employers fail to realize those that they think I don't want to pay these taxes?

Well, first of all, what they got to remember is that when it comes to payroll taxes, is that you're better off treating that person as an employee when they are an actual employee. And the reason is, is because if the IRS catches you, not compensating this employee properly, the penalties they can charge are outrageous. Now, another point with that is the fact that if you give them a 1099 as an employer, and they are really an employee, if the person that you're having an independent contractor, but they're really an employee, but they got a 1099.

If that person goes to a tax preparer, like me, who then says, What's going on with this? And, and really, the, the tax preparer really looks at it closely, and says, gets all the details from the individual. What kind of job did you do and get learned does really, really does the homework that a tax preparer should do in the matter. The tax preparer could look over the IRS guidelines as far as employee classification, which is a big, big matter with the IRS is improper employee classification.

The tax preparer like myself could look over the circumstances and go, you know, Mr. client, you are not an independent contractor. Why did you get a 1099? They say, well, that's just how they paid me, which is true. It's just how they paid them. Well, I want to inform you and advise you that because based on the circumstances you described, and based on IRS guidelines, you are actually an employee. Now, here is your options.

And this is something that I that, sadly, I have noticed is not done a lot in the tax industry is Alex, that they're not explained to them. This is how, this is what you can do. As my client, these are the options you have. I tried to explain all of the options to my clients. And in this particular case, the option I explained to them is the fact that this is the form we can file. This is how we file the form. And this is what the repercussions are of filing this form. Now, usually they because there was no withholding on the tax or withholding on it.

They end up paying some tax because they did that Social Security, Medicare wasn't initially withheld from their check. So then they end up paying that in but yet instead of having to pay the other half, we put in all the employer information. And then the employer is contacted by the IRS saying okay, what's going on here because in addition to sending that information in, we also send in another form that says, here's all the details of what this employee what this person did in working for this answering such question is, who controlled the activity, who scheduled the hours, who set the rate of pay?

And there's a whole list of questions you go through on that form. And so what we want to do is go through that. And then as I tell a lot of people the fact that you fill out this form, the IRS will take care of it and I don't know how many instances I've done over the years where I have completed the forms in this matter and the IRS has taken care of it. So payroll taxes are a very important thing. Another show are probably touch on it more in in more detail.

But that is one of simply stated, that is one of my pet peeves when it comes to payroll taxes is that employers need to not shy away from them, but they need to actually pay him because in reality, the employer is really protecting themself by doing that, because the potential risks that an employer is taking by not doing that properly, are just outrageous is not a good thing. So please, I urge all employers to make sure you a whole, you do proper payroll tax withholding.

And then another type of tax, that we're not really going to, again, touch on very much in here, but it is one that may come up. Now, some said, some cities, some larger cities, in particular, have their own local income tax that's held out of a check, we're not going to really talk much about those because those rules vary so much from municipality, to municipality from one side of the country to the other, those are, those are particular to the to the rules. And the same thing is true even with states.

Now, of course, I could talk about the state that I'm in Colorado, because I'm, I've been here I've done taxes for Colorado for a lot of years, and maybe even touch a little bit on some other states. But in general, if you're in a state that, that I'm not too familiar with, then I'm not going to comment on because I don't know that much about that state. But there's always ways to find out. But anyway, we're going to not shy away. And then the same thing comes like with local taxes.

I mean, we think about other local taxes, that one's paid course I mentioned about the local sales taxes, you got local property taxes, you got local excise taxes, you got other taxes that all fall in there, we're not really going to go into those type of taxes, because once again, those fit into an area that are more specific to a certain area, or certain part of the country. So we're gonna mainly just sit here and we're going to look at the federal income tax code in a way that is just what it is, what the code is, what it actually says, not what you hear people in any anywhere say, but what the code actually says from a very objective standpoint.

And so that anybody who wants to and do it, right, can do it right. And certainly, that's where we're going to focus on and we're going to touch a little bit more when we come back on how we're going to talk about some tax planning, so that we can pay the lowest income tax that is entirely possible.

One of the biggest challenges I encounter in doing tax returns is the fact that I have people come in during tax season. And they say, Well, I started a business last year. And I'm just like, you started the business. And in some cases, it's people I've done business with for a while. And then my next question is, you started a business last year.

Why didn't you come see me? And then they just kind of give me that deer in the headlights look like, anyway. But yet, where the challenge comes in with that is the fact that oftentimes, they want you to fix things, or they want me to fix things that they try to make sure they don't pay that much tax on their business. Well, we're talking, okay, the year ended on December 31st. And you're in, in here in the office, like, say, February 20^th.

If you'd have been in here, like two months ago, we could have done more. But we're gonna have to run with the numbers that you have right now, which is going to be x amount of tax that you're going to end up owing, because we didn't sit down together ahead of time, which basically leads back to the part I'm going to cover here, which has to do with proper tax planning for the lowest income tax. And in the case of a self-employed person, would also be self-employment tax.

Now, a little bit about self-employment tax is a that's we need to make sure you understand is that self-employment tax is the Social Security and Medicare taxes that you normally have held out of your check when you get a W two from your employer, that 6.2% to 1.4, or 5%. Now, self-employment tax also takes in the portion that the employer normally matches on your behalf. So when thinking about that, which is bad approximate about another 15%, there's a calculation the IRS doesn't there, but I just usually just throw out 15% just for simply planning and simplification purposes with my clients, so that we can help plan a properly.

And so as we look at tax planning, overall, whether you're self-employed, or you're working for an employer, minimizing a person's tax liability, is absolutely essential and absolutely possible. Now, there's a number of circumstances and a number of factors that can play into what can minimize your tax liability. And even when you file your tax return of how to make sure that when you do file your tax return, that either ideally you break even, or you pay very minimal tax, or you maybe get a little bit of a refund.

So that's what I try to work with my clients to help them to work to do is to just get that nice balance in there. So basically, you're not giving the government, the IRS a non interest bearing loan for six months, three months or whatever. We want to make sure you get the maximum amount throughout the year. And that's through proper planning. And so in minimizing that, what I try to do and working with people is to review a plan, is to sit down and make a plan. Part of making out a plan is to help you to establish goals. Where do you want to be? Where do you want to go to? What's your goal?

Next year, two years, three years? What do you want to eliminate? We sit down, I want to look over not just consider your taxes, but your over-all financial focus to help you get better cash flow. Now, what we do when we do that is we sit down, we work together, we review look over the current year and also look back perhaps. What did we do in the prior year, which is many times what I'm having to do with clients that we stopped we look at, this is what you did, in this case 2019 did this work?

And the vast majority of time, you know what the answer is? The answer is, it did not work. That's why we're sitting here now is because we need to figure out how to fix that. And we don't want to be doing that in November, which is next month, frankly, now we would actually want to be doing that like, right? Right after tax season. And even through the summer sitting down looking at these areas, having regular meetings to make sure that you are saving time, and that you're saving money.

And basically, what I'm talking about here is that we what we do is we take on a year-round approach, we just don't stop and look at it at tax time, because by the time we get to tax time, it's basically too late. Now, though, there are a few adjustments we can do at tax time, like perhaps make a contribution to an IRA, deductible IRA, or in the case of some small businesses, you might be able to do like a SEP IRA.

But those are adjustments, those help. But yeah, with some better planning, and looking at things that it's better time of year, we can do some better tax planning, do some saving. Now in the case, for those who are self-employed and have a little like sole proprietorship business they're operating, that's taking good advantage of their deductions. Of course, some of that also is not just going off what you have in the checking account, that's were working together, and having you to have a good profit and loss.

So that you know how much money you're actually making, not just saying, Oh, I got money in my checking account, I must be doing just fine. Well, the money in your checking account is great. And it's wonderful. But it's not an actual position of where you are financially and where your business is made for the year. Because oftentimes, as a sole proprietor, what are you doing, you're taking money out for where to live. And as you take money out to live, basically, you're like drawing on the profits.

And so because that money that comes out, like that is not a business expense. And that's money, you could possibly pay self-employment tax on at the end of the year. So where we got to come back, and that's where working together and planning throughout the year, we can make sure that either if you need to make like an estimated tax payment through the year, you're able to do so. And we get it set that way.

Because you'd be amazed how often I've seen tax returns I've come through a business makes several $1,000 or 10s of $1,000 in a year. The individual brings their paperwork in and brings in their the profit and loss that they determine that they made. And they know they made money. But yet they're paying out several 1000 in taxes, not just income tax. They're paying out self-employment tax, and their strategies that we're going to discuss as we go through that can help ones to perhaps minimize that, and be able to do even more.

And so part of our whole plan in working with people is to not only help you save on taxes, by developing good tax strategies for you. We want to help you save time. Yes, help you save time, we want to help you to automate, because there's a lot of work that you do in your business. And you're good at what you do whatever that business is. I mean, there's people here that do that I work with that do great work on truck, on diesel trucks, great work. But that's what their business is. And that's what they know, they don't know what I do.

They love what I do for them because it allows them to do what they do. Got people who do great work on tree trimming, trim trees, that's what they do. They love that they're great at that, boy, it comes to the numbers like what I do. It's just not their thing. And I can go on and on and on about examples of ones who are good at what they do. But yet the items that I help them with, and I work to streamline, automate, help that busy work so that they can concentrate on what they're doing.

And then so you can concentrate on what you're doing. My goal is to help you to make money, not just file your tax returns. That's a part of what we do. So let's keep this in mind as we work to not just have a little bit of planning, but to have a whole plan throughout the year. Have a plan that helps you to grow your wealth faster. We'll work on establishing goals. You may have some pains that you have to deal with some things we got to work to eliminate?

Well, we can work to eliminate those pains for you so that you can focus again, on growing your wealth. And even in these times that we're in right now going through this COVID. Having to stay home, maybe we've had more time to look at some of this information. But yet, we still need to think about taxes, and something I'm going to discuss in a later show is unemployment. Many people probably listening to this show, receive that extra unemployment from the government.

Now, one thing that I don't know how many people realize, or even understand is that extra $600 a week that was paid is considered taxable income. Now, there's other effects I'm going to discuss in a later show that it also has. And so these are things maybe that need to be discussed and sort of work out. And so we want to help you to be proactive, not reactive. We want to be proactive in our approaches, so that you pay as little tax as possible, as well as the fact that you can grow your wealth.

We help you develop strategies, help you to be compliant, because our overall goal is to help you as our clients to do the best you can financially and to grow your wealth because we don't, we believe that you don't have to be rich and famous to be able to get the help you need. We want you to be able to get that help and get better results simply by getting some proper planning done and working together with a professional who can help you not only to file a good, accurate and complete tax return the first time while at the same time also helping you to effectively grow your wealth. 

We've covered a lot of information that is, regardless of the purpose of this show and how we're going to help you to better understand your individual tax return. How could prepare a good business tax return as well so whether you're an Individual, you have a Corporation, an S Corporation, a Partnership, an LLC.

We're going to be able to cover a lot of information on the shows coming up. To be able to help you to both tax returns, and there's just so much information that it's going to take multiple shows us to cover multiple subjects but we do really appreciate you being here. A couple things I just missed earlier I wanted to touch base on. One, is a myth that I missed that I wanted to mention is the fact that many times during the course of the year.

This often happens with children. I have a client come in, and what happens is that they'll say well this other tax preparer says such child was claimed on a tax return, and there's nothing I can do about it. That's because if a child has been claimed on a tax return because they're electronically filed that means if the return was rejected because said dependent or said child was claimed on a tax return and most commonly this happens in the case of divorced parents, although sometimes it does happen when there's individual who shouldn't be claiming the child, claims child are trying to get away with claiming the child now.

They always look back at them with the confused look when they say that because I'm like, that is really unusual. But whoever that is, would say that, because I deal with this, I have at least one or two of these cases, each and every taxes. And I always say, Well, no, that's not true and it isn't true, and I know it's not true. You can fix that situations if your dependent has been falsely claimed on a tax return that are basically you can even say fraudulently claimed on another tax return that they're not supposed to be claimed.

And I've helped many, many parents especially single parents in this case, they're sometimes married because it's like a second marriage for some fix that so that they get the money they deserve because the child that they claim that they're eligible to claim we'll get more into this in another show. But yet, if a child was claimed on another tax return, simple matter is. Yes, it can be fixed, and I certainly help once to fix such matters. Now I touched a little bit earlier on tax software, and why it's not important, not completely rely on the tax software. Well as a professional that we're using as a professional grade tax software, and one who's gone to many different seminars over the years and I've actually heard from several instructors, where they encourage you not only to get know the tax rules and understand the tax rules, but really make sure your tax software is putting things in the correct place. Now there are many types of TAX software and there's some design for individuals, and some that ask them questions and supposedly though we ask those questions, it'll put it in the right place.

Now one thing on some “Do It Yourself” software, they do ask questions but if you don't answer those questions right. Who knows what the tax software puts it? So that's why it's not always good in some situations to rely on this just the software, knowing where it goes, knowing how it's supposed to be put on is vitally important that I've had to actually fix tax returns on a numerous occasion that were initially prepared on “Do It Yourself” software, and it was simply because the client, and they're doing the best they can.

These are great people. They just didn't understand they thought, this is the software and it should be putting it in the correct place. And I looked it over and I said, no this software didn’t put it in the right place. And this is how we got to fix it, which then I make a recommendation, especially if it's gonna make a significant difference that the client file an amended tax return. And then we file the amended tax return and the client either pays a little bit of extra tax they owe, or in some cases this is actually what happens in many cases.

The client actually gets a bigger refund than they would have originally gotten. So it's really tricky on software and so that's why I'm always going through reviewing the rules, looking at my software going okay is this in the right place and vast majority of the time it is, but occasionally I do find where even the professional software, sometimes it's just not in the right place. Sometimes just the fact of getting familiar with your software as well, and doing it multiple times within your software.

But yet, it is still vital to know the rules which is why I stressed the importance, especially if you have anything like small businesses, some type of farm. If you have rentals, if you are involved in some type of partnership, or an S Corp, or even a nonprofit. I haven’t mentioned nonprofits yet, you're a nonprofit, it's really good to have a tax professional. Do your tax return. Now an important part here of why it is so important is because as an enrolled agent like myself.

I can be there to back you up and I back up my work to represent you before the tax return. That's the challenge if you use “Do It Yourself” software is who's going to represent you? Or if you do certain other, or if you have your neighbor do it, or if you have this person that claims they know how to do it which we'll probably talk about this more in another show what's known as the “ghosts tax preparer”. The chief person down the street who uses a “Do It Yourself” software, but then doesn't sign the tax return.

And then you get a letter from the IRS about it, and they're like, you're not responsible because they didn't find the tax return as the paid tax preparer, actually that's a whole another subject but that is something you got to be aware of and watch out for. So watch out for those things and keep in mind please that once again as we go through this show, focus on your personal and business income taxes. We want to help you. We want to help you learn about deduction.

We want to help you to know how to use your vehicle, or your vehicle can be deducted, legally, that's what we focus on is how you can do everything legally and not just go with well my neighbor's that I can do this, or this person has been doing it this way, or whatever the case may be, you, you cannot rely on Mr. Joe down the street. It says well my accounts been doing it this way for years. Well, one thing I've learned is that many, there are many people who do taxes.

And sadly, sometimes they just don't do them right. And they're supposed to be professionals. So it's very, very, very cautious, which is why we really take this seriously and why we work and do this show to help once you understand that, as well as I'm going to talk about here in the last few moments about as I emphasized about planning, advising. That's what we want to work with ones to help to do, is to do their Planning and Advising in advance, for the tax year.

Doing it, do the tax year throughout the tax year, so that they can be best prepared, have their goals established, make adjustments on your withholding with your employer, so that maybe you can take advantage of the new W-4 form which in itself is very confusing. But yet, we can help ones do that and we will help ones do that as part of our Annual Planning Program. And then of course always review in November so that last minute adjustments can be made.

So each of these areas here we want to help you to work on, and to continually work as we work as a tax answers advisor here for you to be able to maximize your cash flow, help you to grow well. And of course, make more money, focus on guarantees and have good cash flow throughout the year and eliminate any and all pain. This is Marcelino Dodge, I really appreciate you listening to this first show of The Tax Answers Advisor, and we're going to come back again, and share even more down to earth, common language tax information with you, as we'll discuss about dependents on your personal tax return. Again, thanks for listening so much to The Tax Answers Advisor. I'm Marcelino Dodge.

Cash Tracks Financial of Colorado Springs

Marcelino Dodge, EA

525 N Cascade Ave

Suite 200

Colorado Springs, CO 80903

(719) 359-8789

www.cashtracksfinancial.com